Microeconomics: Utility PPT

Utility and Consumer Choice

A budget line shows?

a consumer’s consumption possibilities given their income and prices

Consumer budget line equation

Income = ( PriceX x QuantityX ) + ( PriceY x QuantityY )

Utility

A hypothetical measure of the happiness or satisfaction a person receives from consuming a good or service

Total Utility

The total satisfaction (happiness) a person receives
from consuming a given amount of goods and services

Marginal Utility

The change in total utility that results from a one unit increase in the quantity of a good consumed

Trend

Total utility increases as consumption increases.

The Law of Diminishing Marginal Utility

As we consume more of a given product, the added satisfaction we get from consuming an additional unit declines

Method 1 Utility Maximization

Step 1: Find all the bundles
ON the budget line.
Step 2: Calculate the total
utility for each bundle and
pick the maximum

Consumer Equilibrium

when the consumer has allocated all their available income in a way that maximizes their utility

Method 2 Equalize Marginal Utility Per Dollar

Step 1: Find all the bundles ON the
budget line (i.e., spend your entire
allocated budget)
Equalize marginal utility per dollar
Step 2: Equalize the marginal utility per
dollar for both goods

Marginal Utility Per Margin Equation

MU per dollar = 𝐌𝐔𝐱/𝐏𝐫𝐢𝐜𝐞𝐱