Market

• Introduction to Utility and Consumer Equilibrium

  Describe the concept of utility and explain how consumers spend in order to maximize utility
• Microeconomics


  Seeks to understand the behavior of individual economic agents such as individuals and businesses
• Consumers are trying to get the most for their limited budget and maximize total utility or satisfaction given their budget constraint
• Economists believe that choices people make are influenced by their incomes, by the prices of goods and services they consume, and by factors like where they live
• Consumer Choice and Utility


  Refers to the combination of goods and services a consumer purchases
• When graphing a budget constraint, the quantity of one good is on the horizontal axis and the quantity of the other good on the vertical axis
• The budget constraint line shows the various combinations of two goods that are affordable given a specific budget or level of consumer income
• Utility is the satisfaction or happiness a person gets from consuming a good or service
• Consumers wish to choose the combination of goods and services that will provide them with the greatest total utility
• Consumers can measure their own utility with something called utils, but comparisons between the utils of individuals are not possible
• Joyce can measure his own utility with something called utils
• It is important to note that you cannot make comparisons between the utils of individuals
• Utils are subjective to an individual
• Table 1 shows how Joyce’s utility is connected with his T-shirt or movie consumption
• Typical pattern of total utility

  • Consuming additional units of a good leads to greater total utility, but at a decreasing rate
• Total utility increases as the number of movies that Joyce watches rises
• Joyce can afford any combination of T-shirts and movies which is on his budget constraint
• Table 3 looks at each point on the budget constraint and adds up Joyce’s total utility for each combination of T-shirts and movies
• Calculating Total Utility


  1. Step 1: Observe the consumption at a point

  2. Step 2: Look up the utility values for each item consumed

  3. Step 3: Calculate the total utility

  4. Step 4: Repeat for each point
• For José, the highest total utility occurs at point S, with a total utility of 103 from consuming one T-shirt and six movies
• Tutorials


  • Jacob calculates that he derives 100 utils of satisfaction from buying two large coffees at his favourite Cafe
  • Mariuza’s two favorite hobbies are making pottery and playing tennis
  • The table below represents consumption along Shawn’s budget constraint
• Jacob consumes two large coffees at Cafe and also enjoys a pastry provides greater satisfaction than the above two cups of coffee
• Allison obtains 200 utils from drinking three cups of coffee at Cafe
• Jacob derives 80 utils from watching his favourite TV show
• Mariuza will spend three hours at the tennis court
• Shawn derives 50 utils of happiness from eating his first pizza, 40 utils for the second pizza, 30 utils for the third pizza, and so on with added utility declining by 10 for each pizza consumed
• Optimal consumption for Shawn

  5 pizzas and 0 sodas
• Optimal consumption decision for Jane

  Tomatoes: 30, Onions: 20
• If you spend all your money on apples, how many apples can you buy?
• If you spend all your money on pencils, how many pencils can you buy?
• Marginal Utility versus Total Utility


  • Differentiate between total and marginal utility
  • Contrast and compute marginal utility and total utility
• Choices Are Made at the Margin

  Most choices are made "at the margin" where individuals consider a little more or a little less of something
• Marginal Utility


  The additional utility provided by one additional unit of consumption
• Marginal utility is based on the notion that individuals rarely face all-or-nothing decisions
• Marginal utility is the change in total utility from consuming one more or one less of an item
• The general formula for computing a marginal outcome is the change in the outcome divided by the change in the number of inputs used to produce that outcome
• The marginal cost of one more unit of output a firm produces is the amount that total cost increases when the firm produces one more unit of output
• Marginal utility decreases as consumption of a good increases. This illustrates the Law of Diminishing Marginal Utility
• Marginal utility is the additional utility (satisfaction) gained from the consumption of an additional product
• Law of Diminishing Marginal Utility

  Marginal utility decreases as consumption of a good increases