Overview
This lecture introduces the economic concept of utility, explaining how consumer satisfaction is measured, the distinction between total and marginal utility, and the law of diminishing marginal utility.
Definition of Utility
- Utility refers to the satisfaction or happiness gained from consuming goods and services.
- Utility is measured in imaginary units called "utils."
- The preference between goods is represented by comparing the utils each provides.
Total Utility
- Total utility is the total satisfaction a consumer receives from consuming a number of goods and services over a period.
- It is calculated by summing the utils from each item consumed in a day, week, month, etc.
Marginal Utility
- Marginal utility is the extra satisfaction gained from consuming one additional unit of the same good.
- It is calculated by subtracting the total utility after the previous unit from the total utility after the current unit.
- Example: If total utility after 1 Big Mac is 10 utils and after 2 is 15 utils, the marginal utility of the second Big Mac is 5 utils.
Law of Diminishing Marginal Utility
- As more units of the same good are consumed, the marginal utility from each additional unit decreases.
- This happens because consumers get fuller or bored with each extra unit.
- Eventually, marginal utility can become zero (no extra happiness) or negative (consuming more decreases overall happiness).
Graphing Utility
- A total utility graph shows utility rising but at a decreasing rate, and can decrease if marginal utility is negative.
- A marginal utility graph shows a consistently falling trend due to diminishing marginal utility.
Key Terms & Definitions
- Utility — Satisfaction or happiness gained from consuming goods or services.
- Utils — Imaginary units used to measure utility.
- Total Utility — Sum of satisfaction from all goods/services consumed in a period.
- Marginal Utility — Extra satisfaction from consuming one more unit of a good.
- Law of Diminishing Marginal Utility — Principle that marginal utility decreases as more of the same good is consumed.
Action Items / Next Steps
- Practice drawing graphs for total utility and marginal utility using sample data.
- Review calculations for marginal utility using total utility values.
- Be prepared to define and explain utility concepts.