okay so we ju in our last video we just confronted the idea that jose is going to pick uh point s one t-shirt and six movies okay and you might think well that's it like it's done i can do this um and and that is one way to answer these questions okay but that's not how i'm going to instruct you to answer these questions i show you this as like a starting point but the way we're actually going to do this is by solving his his optimal choice using marginal utility so that's another way to consider consumer choices through marginal decision making remember one of our thinking of economists thinking as an economist on tenants of this course is this idea that each choice is made by considering the cost and the benefit in individual choices okay doing the marginal utility method is gonna we're gonna focus jose's choice in these individual cost benefit choices okay so here instead of going and saying all right what's bundle s what's model r what's bundle t we're gonna look at jose's individual choices we're gonna make spend one dollar at a time and find out how jose is to best spend all his money so rather than considering every optimal bundle we're going to think about the first thing jose is going to buy and what will make him the happiness once we know what he buys first we're going to see what he buys second once we know to buy second we're going to see if he buys third and we'll keep doing that until all his money is spent okay so it's important to note it's not enough to consider just what would make him the happiest so a ferrari would make me happier than a ford focus but i'm more likely to buy a ford focus why because price matters too so what we want to know is what provides the most satisfaction per dollar for jose so we're going to calculate the margin of utility per dollar and that's how we're going to solve this question i'm going to go through this example a little bit faster with the slides already made in the next example i'm going to do the calculations one at a time for you like i said i just like that example better and so i think the calculations are a little simpler and a little bit more closer to what you're actually gonna do so this example i'm gonna focus more on the big picture and in that one i'm gonna focus more on the nitty gritty like mechanically how we do it so the marginal utility remember is the extra satisfaction you get from receiving one more unit of a good so if i look at his total utility here this is telling me that when jose buys one t-shirt he gets 22 units of utility that means that t-shirt gave him 22 units of utility that makes sense so that's its marginal utility two t-shirts we were told gives him 43 units of utility but what we want to know is the marginal utility of that second t-shirt and so this can be done with just a little bit of math it's just subtraction if two t-shirts gives him 43 units of utility but he already had 22 units of utility from his first t-shirt then it must be the case that that second t-shirt gave him the 43 minus 22 21 units of utility if three t-shirts gives him 63 then it must be the case that he already had 43 from two t-shirts that it gives him 20 units of utility so that's how we calculate marginal utility you simply subtract the level of utility in one level from the level the amount of utility in the level before and that gives you the marginal utility of in this example the eighth movie again this is important because the way we're going to solve this problem is by looking at each individual decision what is jose gonna buy first what is he going to jose again by second so by looking at his margin of utility we can answer this okay like i said in the last slide margin utility alone isn't going to give us the answer we also have to think about the price okay when you go and order something at a restaurant you don't automatically order the cheapest thing you don't automatically order the thing that tastes the best you do some combination of how much money you have how much money you have to spend the prices and how much you're going to enjoy something what tastes the best right and you combine those things to get your choice so that's we're going to do by looking at what's called marginal utility per dollar another way to think about is the bang for your buck so again marginal utility is satisfaction and we're going to divide it by the price so for example in this first one the marginal utility of that first t-shirt is 22 but that t-shirt cost 14 so i say 22 divided by 14 gives me 1.6 the way i would interpret it is that that means that first t-shirt gives him 1.6 utils per dollar okay again that really seems like a made-up uh unit utils per dollar and it really is but what it says is based on the cost of the t-shirt how happy is that thing making you and we do that all the way down so we take that entire marginal utility column and we divide every value by 14 which is the price of a t-shirt and that gives us sorry i'm lost my cursor and that gives us the rest of these values so 14 divided by 14 is one 10 divided by 14 is 0.7 i just divide all these numbers by 14. and i do the same thing here but now the price of a movie remember was given us to seven dollars so i divide all of these by seven sorry take that back all of these the margin utility by seven and that's how you get this value 14 divided by seven is two 12 divided by 7 is 1.7 etc etc and once we have all of this filled up we have the marginal utility per dollar we have all the information we need to figure out jose's optimal bundle okay and so this is how this process is going to work i'm going to focus on the margin utility per dollar and i'm going to keep in mind the price of t-shirts the price of movies and jose's budget and i'm going to calculate his optimal bundle by choosing one thing at a time so jose has 56 dollars to spend remember his he first decides whether he wants to purchase a movie or a t-shirt again that's what mean by the optimal choice by marginal utility is we're not going into this choice by comparing the the bundles the bundles that cost 56 we're making one choice at a time so his first choice is do i want to buy my first t-shirt or my first movie and he compares the bang for his buck the movie's going to give him 2.3 utils per dollar the t-shirt is getting 1.6 euros per dollar so the movie gives him more bang for his buck it is more worth it so he buys the the movie got spent seven dollars he now has 49 dollars left and we're gonna ask ourselves what does he buy next well you can't buy a first movie again so he has a choice between his second movie which is 2.1 utils per dollar remember the log diminished margin utility says this is going to be less so it's 2.1 units per dollar where t-shirts are 1.6 euros per dollar sweet this is still higher so he buys another movie he now has nine dollars minus seven dollars forty two dollars left and we keep going the next is to compare two to one point six so buys a third movie and he has 35 dollars left 1.9 compared to 1.6 he buys a fourth movie and he has 35 dollars left 1.7 compared to 1.6 he buys a fifth movie and he has 28 dollars left and now we're in are the situation we find ourselves in jose has 28 dollars left and when he's looking at the choice between his sixth movie and his first t-shirt we find out they're actually the same so what is he going to choose well if we think of utility as being serious and we're assuming it's serious in this chapter then this is saying he's indifferent we're saying that his utility per dollar the amount of enjoyment he gets by buying these is identical between a t-shirt and a movie so it doesn't matter choose one or the other flip a coin or we can examine that he has enough money for both and so we're going to say he buys both okay so again he had 21 dollars left now he buys the t-shirt which costs 14 he buys the movie it costs seven dollars and we see he's left with zero dollars left and so we end up by that process by choosing one thing at a time we find that he ends up right where we knew he'd end up buying six movies and one t-shirt okay so again we'll go over this process a little bit slower in the next example here i wanted to focus more on the big picture and many students tell me when they first see this that that's a real cumbersome method the total utility method it seems easier well maybe i mean the total utility method does involve using algebra to come up with those choices to begin with all the choices that expend his budget but still there's a reason we go through this first the concept margin per dollar is important to grasp in reality that is what we consider directly or subliminally subliminally when we choose what to purchase so when you go to when you're going to buy tickets for a sporting event or a concert how do you decide which tickets to buy right you decide because you think about how much enjoyment you're gonna get at particular seats and you think about the cost you think about the bang for your buck you think about the margin utility per dollar that is the thing that that guides your decision when you decide to purchase something like this marginal utility marginal utility per dollar really is the linchpin to understand the humans decisions and so that's why we focus on this most people don't choose the cheapest car most people don't choose the best car most people combine those two and choose the one that maximizes the bang for their buck that maximizes their margin of utility per dollar next consider this we can think about that sort of result at the end if at the end jose looks at his purchases and realized that he would have gotten more bang from his buck if he had bought one more t-shirt and didn't have bought too many movies then that means the margin utility for t-shirts is greater than the marginal utility per dollar for movies and that means he made his wrong decision his decision wasn't optimal okay so that was a little confusing so let me unpack that again if he goes back and looks at what he bought and thinks you know what i would have got more bang for my buck if i bought more t-shirts and less movies that's what we're saying here that means the margin utility per dollar for t-shirts is greater than the marginal utility per dollar for movies that signals that he made a less than optimal decision or the other way around if he realizes you know i bought too many t-shirts i'm sure about more movies he'd be saying that's the equivalent of saying the margin utility per dollar for movies is greater than margin utility per dollar for t-shirts so if this one is not optimal and this one's not optimal then the only way you can make an optimal decision when besides deciding between two goods is when marginal utility per dollar is equalized this is called consumer equilibrium consumer equilibrium means the marginal utility per dollar for one good is equal to the marginal utility per dollar for another good and if we go back to his optimal decision here at one and six we see this is born out here the mortgage utility per dollar for t-shirts was equal to the marginal utility per dollar of movies that's consumer equilibrium okay all of our uh examples in this text and i create are gonna leverage consumer equilibrium so always see that at the end this margin totally per dollar is being equalized um but that's a more important concept if you consider you can continue on the econ and you take um an intermediate econ microeconomics class consumer equilibrium becomes a big deal and becomes sort of the basis for a lot of the theory that's done in those classes and so i think because i look at this these classes as partly to help prepare you for eventual future classes so i think it's important to bring this up but the truth is we don't focus on consumer equilibrium as much in this class so we're focusing more on the process that gets us there than that concept as a whole all right so that's the end of this video there's one video left and we're gonna go through another example and then that's the end of the chapter six lecture videos