Okay, and in this video what we want to do is we want to go further into the idea explaining that demand curve is the marginal benefit curve and particularly important to understand this idea when it comes to later on market equilibrium and the functions of the price mechanism to understand how markets can bring about an efficient and usually the best allocation of society's resources which always have alternative uses. So we're talking about, you know, like demand and the demand curve, but let's remind ourselves what marginal benefit is. It's the extra benefit measured in currency.
It can also be utility, but usually we refer to that as marginal utility. So the extra benefit measured in currency that the consumer receives from consuming one extra unit of a good, or at the very least, in the ex-ante sense, before they make this transaction, they believe that they will receive. Okay, so what we've got here now is we've got Adam, Brian and Carol. And basically what I'm doing now is that I have marginal benefit up on this axis and I have quantity of shirts per month down on this axis. And what we can see is that we have the marginal benefit to Adam of the first t-shirt which is nine euro and the second t-shirt which is six, which is showing the low diminishing marginal utility even though it's measured in euros.
We have the marginal benefit to Brian of buying the first t-shirt and the second t-shirt again. consistent with the law of diminishing marginal utility again even though it's measured in euros if he got more happiness from it he would be willing to pay a higher price and the marginal benefit of the first t-shirt for carol which is 10 and the second t-shirt with this five so what we're saying is that if we were to um measure marginal benefit of the first t-shirt well then who would get the highest benefit from it so carol would So therefore we put a dot which is between 10 and in line with both 10 euro and 1. That is the marginal benefit, the maximum amount of benefit that would be received by a person within society from consuming this t-shirt. Okay, well then the next person down that would be willing, or the next marginal benefit down would be Adam, which is 9 euro. So therefore Adam, like Carol got 10 from the first one.
Now, she'd only get five from the second, but then from a point of view of society, if two were produced, the maximum willingness to pay for the marginal consumer, which was Adam in this case, would be nine euro. Now, again, if there were two, Carol would buy one for nine euro and Adam would buy one for nine euro. So, Carol will get a little bit of extra benefit, but more on that in a later video.
For then the next person down, the next person, the next willingness to pay. based on the marginal benefit that they would receive from consuming a t-shirt is Brian who would get eight euro worth of extra happiness eight euro worth of extra benefit from consuming a his first t-shirt but the third t-shirt of society and what I hope you can see that I'm doing here now is that I am placing people or I'm placing the willingness to pay but not really that the marginal benefit received by those from their willingness to pay um for consumption demand consumption of these t-shirts so the next now is actually so it went brian was the third now he's the fourth because he would get he would get eight euro marginal benefit from the first t-shirt but seven euro marginal benefit from the second t-shirt so he's going to buy another t-shirt And what we're doing now is putting society in rank. order in terms of the marginal benefit that they receive from consuming extra units of t-shirts that's all we're doing so and how do they gauge this well they gauge this based on their own belief system which isn't perfect but i mean they reckon that this is true so the next person down now would be um up to adam again and he would get six euro marginal benefit from consuming one more t-shirt and the last now is carol which would get five euro marginal benefit from consuming one more t-shirt so what i want you to see here is that what the when i'm coming to this and i'm giving it away in the previous video so i'll give it away now what the marginal benefit curve particularly now this is society we're assuming that these are all the consumers in society and what the marginal benefit curve is ranking those that will get the most benefit from something down to those that will get the least benefit from something Okay, and if we join these dots, we get the marginal benefit curve.
So the marginal benefit is dependent on which unit of the good is being consumed, right? So we know from the law of diminishing marginal utility that as consumers consume more and more units, successive units, extra units, the satisfaction obtained from each... successive unit will fall and this is represented in the previous table and on the diagram so basically what we're saying here is that there's there's two ways we're sorting this right so we can see that the law of diminishing marginal utility is setting in because the extra benefit that they are getting granted it's in terms of euro not in terms of utility expressed here explicitly but it's implied that they would get less utility from it because they're willing to pay less for each successive unit okay and then also over here when we're deriving the marginal benefit curve. So you see, All the previous slide said was that the first unit for Adam was worth nine and the second was worth six. That is less.
So it depended on which unit we're talking about. Was it his first or was it a second? And what we're doing here is ranking all of this table in terms of decreasing marginal benefit that they receive from consuming each successive or marginal unit of a good.
The next good. That's all it's saying. I'm trying to avoid fanciful language, and at the same time, I'm trying to bring it in so that you understand it.
Okay, now, if tastes and preferences for the good increased, I think you would agree that the marginal benefit from consuming each unit of the good increases also. Because if they want it more, why do they want it more? Well, they want it maybe because they're victims of advertising, but they want it more because they believe it will give them a higher amount of marginal benefit. And if we use this crude method granted, But if we use this crude method of trying to measure the marginal benefit in their own minds in terms of money, we can get a relatively good approximation. So what I'm saying, though, is that if something changed, taste and preferences, it's one of the non-price determinants of demand.
If that were to change, causing people to want the good more because they believe that they would get a higher level of marginal benefit, this would cause the marginal benefit curve to shift upwards. So why would it shift upwards? Well, it would only shift upwards if each of these increased.
And why have these things increased? Well, they have increased because taste and preferences have moved more towards the product. Okay, now I just want you to see that.
So each of these here, each of these numbers is increasing because they believe they will get greater marginal benefit from consuming extra units of the good. And as such, that is because their taste and preferences have moved more towards the good. So what do we get? Well, we get an upward shift of the marginal benefit curve to marginal benefit 2. Now, I hope that makes sense, right?
This means that the marginal benefit is increasing at all quantities. So yes, there is a low diminishing marginal utility. Yes, there is a reducing marginal benefit.
I'll actually just happily go back here, right? So what we're saying is even though we have the new higher values, what you can still see is that the low diminishing marginal utility is kicking in. And there is a diminishing marginal benefit the more and more t-shirts that each person buys. I mean, just think about it.
If you had a thousand t-shirts, you couldn't really wear them. So it's like the thousand t-shirts is worth nothing if not of negative marginal benefit, which is a marginal cost. All right, so that would cause the marginal benefit curve to rise if tastes and preferences increased because each consumer is considering that they are getting a higher marginal benefit per t-shirt. bought um and i've said all that excellent okay if taste and preferences for the good decreased the marginal benefit from consuming each unit of the good decreases also and this would cause the mb curve to shift downwards well starting at the original table that we had and if we just kind of lower all of these prices down to well flip all essentially what we get now and this isn't like drawn to scale or anything but we get something along the lines of this which is um um a reduction a downwards down not out or in but downward shift of the marginal benefit curve now and yeah that's what i said this means that the marginal benefit is decreasing at all quantities of t-shirts every single one the next one the next one the next one now if we change the idea of marginal benefit to instead equal price the marginal benefit curve becomes the demand curve so if the price was six how many goods would be bought.
So basically, we go out from six, touch the demand curve, and now we're straight down, and that's five. Now you may, and I can understand, you may think that that's like kind of an academic trick or something like that. But it's not.
It really isn't. Because what does the demand curve show? It shows the quantities, the combinations of quantities and price.
And why would somebody pay that price? Well, that's because they're willing to pay it. And why are they...
willing to pay it because they value it that much and why do they value it that much because they believe they will get that marginal benefit that extra bit of benefit from consuming one extra unit of a good. So if there's only one person, I believe it's Carol that's up at the 10 euro, she believes she is willing to pay that because she values it that much, because she believes she will get that at least that much marginal benefit or at most that much marginal benefit, excuse me I get silly sometimes. And that's why I want you to understand that this here now is the demand curve, the market demand curve for society in terms of t-shirts.
But also, and it's not a trick of the mind, and I will say it again, is that what this demand curve represents is the combinations of price and quantity demanded. And it's the maximum willingness to pay that each consumer has for each good. As we can see. It's not six separate consumers that are willing to pay this. It's three consumers that are willing to pay different amounts because of the low diminishing margin utility.
And again, why are they willing to pay each of these separate amounts? The reason is, yes, the low diminishing margin utility, but because they value each good at that amount. Yes, the second good they value less than the first, but they value it at these amounts here, these prices here.
And the thing is, why do they value? Because they believe that they will get that level of marginal benefit from consuming each good. Otherwise, you would not value it that much. And therefore, the demand curve would be shifted down here.
And this is something that I really want to bring on. Because this is the market demand curve, because we're saying that there's only three people in the market for t-shirts. and this is the amount that they value each t-shirt this therefore is the marginal benefit to society from consuming these t-shirts at different prices now what you will see is that society is better off in terms of demanding if the price falls because more people get them and therefore they're happier but as we saw in the previous video what we do notice is that if the The price is higher. The t-shirts goes to those that... value them the most okay they get the most marginal benefit from them all right and this is the theory that you really do have to understand okay i'm sorry i've probably said all of this over and over again so i do apologize so why are there five quantity or five t-shirts demanded at a price of six euro because each consumer's value each consumer values each unit of the t-shirt more than or at least equal to the 6 euro.
Consumers will, will continue to buy the t-shirts until the marginal benefit measured in currencies euros was greater than or equal to the marginal price the marginal cost which is the price. Now this is something that I want you to understand and even though the video is over I'll go back to one more thing okay marginal benefit curve and the demand curve particularly we're interested in the market demand curve which is the market marginal benefit curve and the demand curve are essentially the same thing. Now, if you want to get very technical, the demand curve shifts outwards and inwards, right and left.
The marginal benefit curve shifts up and down, but the effect is the same thing. The marginal benefit curve and the demand curve represent the maximum willingness to pay for success of just an extra good, an extra unit of a good, okay? The reason that consumers are willing to pay this amount is because they value each unit.
Like, I'm trying to avoid the economic language here. Each successive unit, the next unit, buy that much. And we saw that it fell, fell, fell. So it went down from 10 to 9 to 8 to 7 with the first, the second and the third t-shirt for sale, right?
This is because they believe that they will get that amount of extra benefit from consuming it. That means that they will get that amount of marginal benefit from consuming one more. And when we rank them all like we have done, okay? in society, what we actually get is, now this is a different one, but when we rank them all in society, what we actually get is a descending order of marginal benefit per consumer. Now I can understand that that may appear difficult, not just appear difficult, be difficult.
I can get that. But what I want you to understand is this, that basically, even though it's a different one, let's say these are T-shirts, right? The first t-shirt is valued by society, assuming that everybody is a different consumer. No one buys any t-shirt, more than one t-shirt. And this is the market demand curve.
So the first t-shirt is valued by society because it's valued by an individual who is part of society at 50 euro. Right, now these are obviously good t-shirts. But essentially their maximum willingness to pay for the first t-shirt is 50 euro.
and then And the reason why... It's their willingness to pay is because they believe that they will get that much extra benefit. They want to look so good in their t-shirt that they believe that this t-shirt will give them 50 euro of looking good.
Alright, you know, trying to keep it simple. Maybe that's confusing, I don't know. Now the second person has a lower willingness and ability to buy the t-shirt. So it is the second t-shirt to society, but the first t-shirt to the second consumer.
And the reason that they are willing to pay their maximum, that they are willing to pay is 40 euro, is because they value that t-shirt as giving their life an equivalent worth of 40 additional euro. That's the idea. Now look, I don't encourage consumerism, right? I don't.
I like, it's not a recipe for happiness. But all I'm saying is there are important things that we could have talked about. I've talked about something frivolous like t-shirts.
What if we talked about medicine? What if we talked about hospital treatment? What if we talked about education, something like that? Then it becomes not a joke, and that's important. Now, again, the third person, and it's willingness and ability to pay.
That's what the demand curve measures. And this is the market demand curve for T-shirts, but again, it could be anything. So they value the maximum amount that they value their first T-shirt, because this is the third consumer, is 30 euro.
So what we're doing is we are ranking, and nobody values it at 60, we are ranking from the highest marginal benefit, the consumers that believe they will receive the highest marginal benefit from consuming a t-shirt or a good, or more accurately, an extra unit of a good, or more accurately still, the marginal unit of a good. Okay, this is the man curve for t-shirts, for the market as a whole, for society as a whole, because we're only talking about t-shirts. The reason that they value this next t-shirt as 30 euro is because they believe that they will get that much marginal benefit from it.
So why is willingness to pay equals that means that they value it that much? And why do they value it that much? Well, because they believe that they will get that much marginal benefit.
So what I want you to see is that the demand curve, particularly the market demand curve for an individual good, represents the marginal benefit. to society as perceived by the consumers of the consumption of that good. And that is very important.
Society in general gets benefit from consuming goods and services. All right. That is true.
It is down to the individual's tastes and preferences and obviously their income and the rest of it, how much they value it. And it has to be a willingness and ability to pay. But if we rank all the desires, the maximum willingness to pay for each consumer in the market, and put them from the most to the least, what we will get is the societal marginal benefit curve from consuming that good or service.
Now, guys, look, that's the end of that presentation there. I've said all that. All I want you to see here is just this, that look, there is diminishing marginal utility. Yes, there is. And we are ranking people, we are ranking society from the highest marginal benefit to the lowest marginal benefit that each receives from consuming one extra unit of a good.
In this case, I don't know what it was, and there's t-shirts again. Okay, so at a price of six euro, the person that values it at six, which was Adam, would be indifferent. And people are like, no, no, no, he wouldn't buy it. He values it, he gets it.
No, he would be indifferent between the six euro in his pocket or the T-shirt on his back. Okay, so I wanted you to know that, that they would be indifferent between the two. And then when we measure this thing called consumer surplus, which is a part of welfare economics, what we will say is that we assume that they buy it rather than go without the goal. Now guys, thank you so, so much for watching.
I really, really hope this helps. And I very much look forward to seeing you in the next video. And thanks again.