Marginal utility and total relationship test

Marginal utility and total utility (video) | Khan Academy

marginal utility and total relationship test

What is the relationship between marginal utility and total utility with the help Prepare for the CPA Exam & gain key accounting skills essential to any business. Relation to utility, consumer choice, allocative efficiency. Marginal Consumer Surplus = The excess of a person's total utility from the. Each individual unit of a good or service has its own marginal utility, and the total utility is simply the sum of all the marginal utilities of the.

marginal utility and total relationship test

However, if we eat the sixth piece of chocolate cake, we start to feel ill — and so we get negative utility Utility and price One way to measure utility is to give the utility a monetary value. The first piece gives p of utility — which is greater than the price of 90p. The second piece gives a utility equal to the price. The third piece would give marginal utility of only 60p — which is less than the price of 90p Marginal utility and allocative efficiency Suppose the consumption was a quantity of In this case, the marginal benefit utility is greater than the marginal cost — there is a deadweight welfare loss and underconsumption of the good.

Consumer surplus This is the excess of what a consumer would have been prepared to pay compared to what they actually pay. Therefore, a rational consumer will increase consumption of petrol, until the MU of petrol equals the price at 50p and a quantity of Demand curve and Marginal Utility Our demand curve is derived from our marginal utility.

If a good gives us more satisfaction, e. In the past, I've used the word marginal benefit. They sound very similar. In fact, I even used the word benefit when I defined the word utility. How are these two things different? And the simple answer is, conceptually, they aren't.

Marginal utility theory

Conceptually, they are the exact same thing. The difference is how the words tend to be used in the context of a traditional microeconomics class. So when people talk about utility, they tend to measure it in terms of some type of absolute measure that they just came up with. You can view them as utility unit, some type of satisfaction units. While when they talk about marginal benefit, they tend to measure it either in dollars or in terms of some other goods.

But I've seen either term used either way. So they really do mean the exact same thing. But in this video, we're going to use the term utility, and we're going to come up with a measuring scale, and it's a somewhat arbitrary one. And we're going to use that to come up with some conclusions about the basket of goods someone might purchase depending on different prices.

So as you could imagine, I pre-wrote these two things. We're going to talk about chocolate bars, and we are going to talk about fruit. So right here in these little tables here, I've shown the marginal utility of each incremental. In the case of chocolate bars, each incremental bar, and in the case of fruit, each incremental pound of fruit.

Relation between Total Utility and Marginal Utility (Consumer Equilibrium Part 2)

So this is saying that first chocolate bar-- obviously, if I have no chocolate bars I'm getting no utility from chocolate bars-- and this is saying that that first chocolate bar has a marginal utility. So the utility of that next incremental one is I'm not saying it's equivalent to pounds of fruit. I'm not saying it's equivalent to berries.

I'm just arbitrarily saying it is And what matters is not that this is or 1, or a million. What matters is how this compares to other things. And this is what we said right over here. I could have set this to be 1, and this to be and this to be 1, I could have set this to be 10 and this to be 8 and this to be What matters is, is that they really just have the same ratios between them that really do reflect my actual preferences.

So let's just think about this a little bit. My first chocolate bar, I'm pretty excited. I just call it The next chocolate bar, I'm a little bit less excited about it.

marginal utility and total relationship test

I've already had some chocolate. My craving has been satiated to some degree, but I still like chocolate. So I'll call that an We could call it 80 satisfaction units, whatever you want to call it. Then the next chocolate bar after this-- now I'm starting to get pretty stuffed, and I'm really chocolated out. And so I'm not getting as much benefit from it. And then finally if you give me another chocolate bar, it's even less.

And if we were to list a fifth chocolate bar, I might not want it at all. My marginal utility might go to 0 maybe for that fifth chocolate bar. Maybe that sixth chocolate bar, I have to somehow get rid of it somehow, because I'm so tired of chocolate bars.

Maybe it'll have a negative marginal utility. And we could think about the same thing with fruit. The first pound of fruit, I'm pretty excited about fruit. I have a fruit craving. So This right over here on this axis. Let's say this is the marginal utility per price. And let's say it also goes from 0 to So that would be And the numbers actually don't matter so much here.

marginal utility and total relationship test

And then this will be dollar spent. So dollars spent, so your buck. So this is bang for your buck and then this is your buck. So this is 1, 2, 3, 4, 5 and 6. Now we're going to do arbitrary products. So let's say one product looks something like this. And once again, you have diminishing utility as you get more and more of that product. In the case of fruit, the more pounds of fruit you get the more tired you get of fruit.

The less fruit you need for that, or the less you want fruit for that next incremental pound. So let's-- but it could be anything. This is true of most things. So this is product A, could be a service as well. So product A, let me write it this way. So this is the marginal utility for A per price of A. And let me get another product right over here. So let's say my other product looks something like this. So this is my marginal utility for product B per price of B.

Utility maximization: equalizing marginal utility per dollar (video) | Khan Academy

So it's really saying bang for the buck. So just to start off-- and I won't even constrain how much money we have. I just want to think about how we would spend that money. So if I were to spend, if I had a penny, where would I spend a penny. And I'm assuming I can buy these in super small chunks, as small as maybe the penny or even maybe fractions of penny.

So if I just had a penny, and I had to think about where am I getting the best bang for my buck for that penny, I'm clearly getting it with product A.