Utility vs. Marginal Utility
- arbitrary measure of benefit one receives from an activity (measured in utils)
change in total utility generated by consuming one additional unit of that good or service
Air, for example, is necessary for survival but tends to have little value in terms of marginal utility.
Diamonds, on the other hand, provides lots of marginal utility for many consumer.
Marginal Utility Per Dollar
The marginal utility per dollar spent on a good considers budge constrains
We are constrained by a budget.
The role of scarcity comes into play when making consumer choices.
We prefer a vacation to Hawaii over a movie, but we must consider the cost of each decision.
If Hawaii's marginal utility is 500 but costs $500, and a movie's marginal utility is 50 but costs $10, what do we choose?
Marginal Utility Per Dollar for Hawaii:
Marginal Utility Per Dollar for movie:
Since 5 > 1, choose movie
Diminishing Marginal Utility
As a person increases consumption, there is a decline in the marginal utility from consuming each additional unit of that product.
You get less "bang for your buck"
Applies to most, if not all, products at a certain point.
All You Can Eat restaurant can stay in business because of this principle.
Optimal Consumption Bundle
Marginal utility per dollar must be equal for both products
Consumers instinctively follow this rule.
Within a limited budget, we are required to make choices based on what we value.
Keep on selecting the item that has the HIGHER marginal utility per dollar.
Due to diminishing marginal utility, that value begin to fall until equals the marginal utility per dollar for the other item.