concept of margin

• Neoclassical thought


  Economic agents will always look to maximize their benefit
• Economic agents assumed to maximize


  • Firms - profits
  • Governments - social welfare of citizens
  • Workers - welfare derived at work
  • Consumers - utility
• Utility


  Satisfaction derived from consumption
• Marginal utility


  The extra utility gained when one more unit is consumed
• Average utility


  Total utility divided by quantity
• Marginal utility and marginal private benefit are equal
• Plotting marginal and average utility curves

  1. Label y-axis as utils (units of satisfaction)

  2. Label x-axis as quantity (cups of Coca-Cola)

  3. Curves are downward sloping due to law of diminishing utility
• Law of diminishing utility

  As quantity consumed increases, the marginal utility derived from each extra unit decreases
• Total utility is maximized

  Where marginal utility is equal to zero
• Total utility curve is derived from the law of diminishing utility
• Rational consumer


  Consumes units up until where marginal utility is zero to maximize total utility
• Price is equal to utility

  Rational consumer will consume up until marginal utility equals price
• Marginal utility curve is the demand curve
• Price increases


  Quantity demanded decreases
• Price decreases


  Quantity demanded increases
• Marginal utility is the basis for the downward sloping demand curve