okay guys and in this video we're going on to our third reason in our very technical analysis explaining why the demand curve slopes downwards now don't forget all a downward sloping demand curve shows is that there is the existence of the law of demand and all the law of demand shows it or says is that as prices fall or as the price of this good or service falls people tend to buy more of it and as the price of a good or service rises people tend to buy less of it okay that's all it shows so we're explaining why the demand curve slopes downwards we said in two separate previous videos one reason was the income effect another reason was the substitution effect and finally today we're talking about the law of diminishing marginal utility now the law of diminishing marginal utility states that as extra units of a good or service are consumed eventually a point will be reached when the extra happiness received from the last unit consumed will begin to fall okay that's what it means um a great example i've got another one here but a great example i think think about like when a a song that you really really really love comes out and you just listen to it over and over and over again by the end you're absolutely sick of it and what that is showing is the law of diminishing margin utility as you continue to consume more and more of that song you're listening to that song the extra happiness that you get each time you listen to it will most likely fall at least after a certain point okay another great example which i'll be using today is food so imagine if you're absolutely starving and you order a pizza and then that first slice you're delighted you want more and more it gave you so much that first slice the marginal utility the extra happiness that's the definition of marginal utility measured in imaginary units called utils and don't forget i've got videos on this um on the introduction playlist um but the extra happiness that you get um is really high for the first slice because you're so you're so hungry and then maybe let's say potentially even the second slice of pizza is even higher but after that you start to get a little bit i would not even full but satiated so the third slice of pizza is going to make you happier potentially but not by as much as the second did or the first it and that's what we're talking about here so the idea is that you could get a huge amount of extra happiness um with the first slice after you know let's say six slices you're absolutely stuffed and you might not even want any more an extra slice of of pizza may give you dis utility may make you less happier than you were without it because if you keep on eating you're going to get sick right so the idea here is that we're just going to look at this um example right so we've got the number of slices of pizza let's say consumed and we've got total utility in utils these are the imaginary units that we use to measure happiness in economics and we've got marginal utility in excuse me in utils and which is the amount of happiness that each extra next slice of pizza gives us so if we start off with zero happiness from consuming pizza because we haven't had any yet and then we have one slice well our total utility is 25 utils and our marginal utility is 25 utils because that's the the amount of extra happiness that we got from consuming that first slice and then that's we've only consumed one so that's our total now after consuming the second slice right we've got 55 total utils of happiness so that's the amount of extra happiness we got from consuming the first and the second consuming the third we've got 75 total utils of happiness so how happy are we after consuming the first the second and the third and so on so forth my god i must have been hungry i'm still getting happier even after the six slice but my question then is well what's the marginal utility how much extra happiness did each next slice give us and what we do here is in order to calculate marginal utility we take mu2 minus mu1 okay so 55 minus 25 that's 30 for this one so to calculate the marginal utility for the third slice it's 75 minus 55 which is 20. the fourth slice to calculate the marginal utility here of 15 it's 90 minus 75 because this is the total amount of happiness you have after you've consumed four and this is the total amount of happiness you have after you've consumed three slices therefore the difference between the two must be the extra happiness that the fourth slice gave us now looking at these numbers because we're talking about diminishing law of diminishing marginal utility so we're looking at these numbers when does diminishing marginal utility set in so we start off with zero of course so go 25 well obviously not then then even the second slice gives us more extra happiness but then the third slice it does give us a positive amount of extra happiness we are happier after having had the third slice than the second but the amount of extra happiness that the third slice gave us was less than the previous one okay because 20 is less than 30. so what we say is the law of diminishing margin utility sets in after the consumption of the second unit or when the third unit is consumed and that's what we're talking about just think about again like going back to that song example keep on listening to your favorite song you will hate it keep on eating your favorite chocolate bar over and over again actually even like you know eat 10 of your favorite chocolate bars in one hour you will not want to eat that again at least for some time okay and that's because the extra happiness that you're getting is going down down down down down and that's the law of diminishing marginal utility margin utility is extra happiness and diminishing means falling okay now looking at myself and my big mac consumption and being a rather rotund individual that i am apparently apparently i can eat six in a row of doing well their last right so let's look at this so what's the total utility and let's see if we can work out the marginal utility from the total utility what we're saying here is that i consume zero big macs i get no utility from the consumption of big macs five i consume one i get ten new tails now just to be clear these these are imaginary units that really make no sense in reality they're just a very good conceptual or theoretical framework within which to work okay but again just think about you know this like have your favorite burger your favorite meal three times in the one sitting you will not get the same amount of extra happiness from the second meal you did the first and i'd say after the third meal you might be getting sick you're getting dis utility right so just you know this guys right so the first the marginal utility from the consumption of the first good is 10. how do i get that because 10 minus 0 which is 10. the marginal utility that i get supposedly from consuming my second big mac is 5. how did i get that 15 minus 10 is 5. the mark excuse me the marginal utility that i get from consuming my third big mac is 2. how did i get that 17 minus 15 is two now this is the interesting thing that i want you to know and this is something that i believe i've referred to in preview in the previous video which i've used these slides on the fifth um big mac because don't forget we're always taking a smart utility divided by price right we're all that's the equity marginal principle right we're at which i've explained in the introduction videos so we're saying that it's five the fifth big mac is 18 totally i get zero extra happens so don't get dis utility i just don't get utility so that at that stage if i was offered it for free i would be indifferent but i i sure as flip wouldn't pay for it because i get no extra happiness for it now the weird thing is here if i was offered this big mac for free i would definitely say no because it's causing me non-happiness disutility it's reducing my happiness so therefore i would actually have to get paid to eat this six big mac i would imagine it would happen before that but sure you never know right now this is the next thing right how do we spend our money and we touched on this in the uh substitution effect video how do we spend our money to get the most amount of happiness and again there's a big this is in the introduction playlist right a rational consumer will spend his or her income in social way at the ratio of marginal utility to price is the same for all goods consumed in this way they maximize total utility and that's what we're trying to do we're trying to get be as happy as possible but in order to be as totally happy as possible we have to economists always think at the margin so the we will spend our money in such a way up until the point knowing that the more of a good that we consume the marginal utility whatever that good is will fall so this is the first good let's say this is pepsi and this is pizza okay so knowing that the more units of each good that we consume this number will fall and so will this but these will stay the same until we change them later on to show why the demand curve slopes downwards okay so was this pepsi pizza and pomegranates why not a bit of alliteration right so a consumer is said to be in equilibrium or is maximizing his or her utility when he spends all his income in such a way that the ratio of mars utility to price is the same for all goods consumed now i have skipped that there's more details explaining this law on the previous playlist which is in the introduction but right now if you have watched those if you haven't certainly watched those videos and come back but if you have watched those you should recognize this example okay so currently at least i'm teaching in mongolia hence the mongolian tourist and i'm irish and so he comes to ireland of course he would where else we go right so a mongolian tourist comes to ireland for a weekend with 40 euro to spend there are two goods he can spend his money on good a and good b or it doesn't matter what they are okay pepsi and pizza why not using the data below what combinations of goods will he choose to consume now just to be clear the price of pepsi god's expense of pepsi is five euro and the price of pizza is 10 euros expensive country art right now take a photo of this guys because this i want you to take a photo on your phone and be looking at this diagram yeah when um i'm doing the answer okay now the explanation as i said okay umpteen times go to the introduction playlist just loads of videos out of there and hopefully you'll understand it better but what we're saying is the mark utility of good a knowing that there's the low diminishing margin utility we can see it the numbers are falling we can see it here the numbers are falling right so what we're saying now is knowing that there's lower dimensional margin utility for both goods how can this consumer get the most total happiness from his 40 euro well we have to look back to the equi-marginal principle which is if we are spending our money where the marginal utility of the last good last kind of pepsi consumed divided by the price of pepsi equals the marginal utility of the last lights of pizza consumed divided by the slice of pizza well then then they'll start potentially to be spending their money in such a way that they are getting the most total happiness so what we've got to do is here see this um mua over pa so don't forget the price of pepsi i know it's a here but price of pepsi is five euro right so we've got the marginal utility then is 50 for the first can 45 for the second can 40 for the third can 35 and so on so on so what we're doing is here this 10 represents the margin utility divided by the price that's that bit there okay and likewise here the margin utility for the first slice of pizza is 80 but it's cost 10 euro so this 8 represents the marginal utility divided by the price now i kind of think that this is related to the substitution effect simply because we're talking about value for morning the more marginal utility you can get divided by the price the higher this number is the better value for money it is because you're getting more happiness per euro spent on the good okay that's what you're doing so what will he do first the question is will he buy a can of pepsi or a slice of pizza well i need you to understand that this represents the amount of utils per euro spent that this consumer will get the amount of happiness per euro that this consumer will get if they buy their first can of pepsi and this eight represents the amount of utils or amount of happiness per euro that this consumer will get if they buy their first slice of pizza well 10 is bigger than eight he's a rational consumer he's going to buy one can of pepsi now that he's done that he spent five years he's got 35 euro left what should he do well let's analyze low diminishing margin utilities kicked in here it hasn't kicked in here okay so should he buy his second can of pepsi or his first slice of pizza as we can see here nine which is nine utils per euro spent that he will receive if he consumes the second can of pepsi is higher than the eight units of happiness or utils that he will get if he consumes his first slice of pizza so he'll buy another kind of pepsi now law diminishing margin utility is kicking in again but we're talking about spending our money in this ratio i haven't started doing it yet don't worry you have to spend all their money right so now he's indifferent between his third slice the third kind of pepsi or first slice of pizza so he will buy them at the same time right now how much money has he spent 5 10 15 25 he has 40 he's got 15 euro left he is indifferent between his fourth can of pepsi and a second slice of pizza so therefore what he will do is buy one of each now he spent five ten fifteen twenty thirty forty all his money is spent he has no further opportunity for maximizing or increasing his utility he has spent his money in such a way that the ratio of marginal utility divided by price for pepsi is the same as the margin ratio of margin utility divided by price for pizza seven equals seven okay so that's it now don't forget the price of pizza was ten euro the price of pepsi was five let's have a look at this there has been a price change there has been no change in any of the numbers that i have given here but there has been a price change the price of pizza has fallen now the low demand says when the price of pizza falls or the price of any good falls we buy more of it absolutely fantastic now let's see what will happen according to the equi marginal principle which takes into account the law of diminishing marginal utility you can take another photo of this guys the only difference is the price of pepsi has fallen uh pizza excuse me has fallen so we have to spend our money in such a way that the ratio of margin utility to price is equal for both pepsi and pizza now let's look at this because the price of pizza has fallen the value in terms of utility per euro spent in terms of happiness per euro spent on pizza has increased so what should he do first well should he buy his first slice of pizza or his first can of pepsi well he should buy a slice of pizza because 16 is greater than 10. okay now he's done that what should he do should he buy a second slice of pizza or the first can of pepsi well he should buy a second slice of pizza because 14 is greater than 10. now what should he do should he buy his third slice of pizza or his first can of pepsi well he should buy his third slice of pizza because 12 is higher than 10. now what should he do should he buy his fourth slice of pizza or his first can of pepsi he is indifferent between the two okay so what he will do is buy one of each now how much money has he spent 5 10 15 20 25. don't forget he's got 40 euro right now what should he do should he buy his second can of um pepsi or his fifth slice of pizza well nine is greater than eight so he should buy his second can of pepsi right so 5 10 15 20 25 30. he's got 10 euro left what should he do should he buy his third can of pepsi or his fifth slice of pizza and he's indifferent to do to between the two because eight is equal to eight so basically what he's doing here is he'll buy both and that is him his total happiness is maximized check the numbers you cannot get a higher amount of total happiness from the 40 euro given the previous table that i've given you where all the numbers are okay now let's explain this in terms of ldmu again downward sloping demand curve why why why why well basically as the price falls people buy more of this good why in terms of low diminishing margin utility well basically what we're saying is the price of the good has fallen i am getting more marginal utility per euro spent on this good than it was before therefore i buy more of this good and less other goods that's it okay that explains this is the final reason why a fall in the price causes an increase in the demand which is low diminishing marginal utility and then to go the other way as the price rises people buy less and why do they buy less well the reason that they buy less is thus um um the price of the good has risen i am getting less marginal utility per euro spent just like the substitution effect which mentioned marginal utility divided by price it's worse value but we're dividing defining value in terms of mars and utility per euro spent therefore i buy less of this good and more other goods now guys that may be technical maybe you need to go back to the introduction um playlist and have a look at that again at the law of dimension marketing utility and the equity marginal returns or the principle of the equity margin returns but i really really hope this helps thank you so so much for watching and i really hope to see you in the next video