Marginal Utility

published on July 17, 2020

What I want to do in this video is think about a concept that we've already thought about multiple times in the context of many many videos and this is the idea of utility utility which is really just a way of saying how much benefit how much benefit or satisfaction

Or value do you get out of getting a good or service but the angle that we're going to take in this video is going to be slightly different in the past when we were measuring benefit or value we either measured in terms of dollars we

Said hey the benefit of getting an incremental Honda Civic was five thousand dollars and we talked about the incremental we're talking about up and we've heard the word many times we were talking about the marginal benefit or

Early on when we talked about the production possibilities frontier we weren't we and we talked about the marginal benefit of another squirrel we were talking about it in terms of berries we were talking about in terms

Of another good or service what we're going to do in this video is just think about it in absolute terms we're just going to think of some arbitrary way of measuring utility and then just assign values to what's the value of getting

One chocolate bar and then what's the value that we give to the next chocolate bar and then the chocolate bar after that and we're going to do the same things about fruit and from that we're going to see if we can kind of build up

Some of the things that we already know about demand curves and how things relate to price and and the price of other goods and things like that and in particular we're going to focus on marginal utility marginal utility

Marginal utility so obviously you could have total utility you could have if I have four chocolate bars you could say the total utility I'm getting from all four of them or you can think about marginal utility the utility I'm getting

From the next incremental chocolate bar or the next incremental prompt pound of fruit and before I move on there's one thing this is was a point of confusion for me when I first learned this is okay I'm using the word marginal utility now

In the past I've used the word marginal benefit marginal benefit they sound very similar in fact I even used the word benefit when I defined the word utility how are these two things different and the simple answer is conceptually they

Aren't conceptually they are the exact same thing the difference is is how the words tend to be used in the context of a traditional microeconomics class so when people talk about utility they tend to measure it in terms of some type of

Absolute measure that they just came up with some type of you could view them as utility units some type of satisfaction units well when they talk about marginal benefit they tend to measure it either in dollars or in terms of some other

Goods but I've seen either term used either way so they really do mean the exact same thing but in this video we're going to use the term utility and we're going to measure it we're going to come up with a measuring scale and it's a

Somewhat arbitrary one and we're going to use that to come up with some conclusions about the kind of the basket of goods someone might purchase depending on different prices so as you can imagine I've had I pre wrote these

Two things we're going to talk about chocolate bars and we are going to talk about fruit so right here this these little tables here I've shown the marginal utility of each incremental in the case of chocolate bars each

Incremental bar and in the case of fruit each incremental pound of fruit so this is saying that first chocolate bar obviously if I have no chocolate bars I'm getting no utility from chocolate bars and this is saying that that first

Chocolate bar has a marginal utility so the utility of that that next incremental one is a hundred I'm not saying a hundred dollars I'm not saying it's equivalent to a hundred pounds of fruit I'm not saying it's

Equivalent to 100 berries I'm just arbitrarily saying it is a hundred and what matters is not that this is a hundred or a thousand or a million what matters is how this compares to other things so for example

If if I will say this is a hundred and if I know that I like fruit a pound of fruit twenty percent more than that first or if I like an incremental my first pound of fruit twenty percent more then I would have to say that the

Marginal utility of my first pound of fruit is a hundred and twenty and this is what we said right over here and if another way to think about it is if the marginal utility of the second chocolate bar I get because I've already enjoyed a

Little bit of chocolate bar and I'm a little chocolate it out is twenty percent less than that then if this is a hundred then this would have to be eighty I could have set this to be a thousand and this to be eight hundred

This to be 1200 I could have said this to be 10 and this to be 8 and this to be 12 what matters is is that they really just have the same ratios between them that really do reflect my actual preferences so let's just think about

This a little bit my first chocolate bar I'm pretty excited I just call it 100 the next chocolate bar I'm a little bit less excited about it I've already had some chocolate my craving has been satiated to some degree but I still like

Chocolate so I'll call that an 80 we could call it 80 satisfaction units whatever you want to call it then the next chocolate bar after this now I'm starting to get pretty stuffed and I'm really chocolate it out and so I'm not

Getting as much benefit from it and then finally few give me another chocolate bars even less and if we were to list a fifth chocolate bar I might not want it at all I might you know my marginal utility might go to zero maybe for that

Fifth chocolate bar maybe a six chocolate bar I don't even I have to somehow get rid of it somehow cuz I'm so tired of chocolate bars maybe have a negative marginal utility and we could think about the same thing we could

Think about the same thing with fruit the first pound of fruit I'm pretty excited about fruit I have a fruit craving I have I like that first pound of fruit even more than that first chocolate bar I like 20 percent more so

I get 120 you could call it utility points or whatever you want to whatever arbitrary unit you want to call it then my next pound of fruit once again I'm having diminishing utility diminishing benefit as I get more more and more

Incremental pounds of fruit now it's very important to realize these this is marginal utility not total utility this is a utility I'm getting from each incremental pound it's positive so I'm still enjoying that eat that next

Incremental pound I'm just enjoying it a little bit less than the pound before and to realize what total utility is if I were to have two pounds of fruit I would get 120 I will you have 120 of utility from that first pound and then I

Would have 100 from the second pound and so you would say I have I got had them I had a total utility of 220 you could call them utility units from both pounds now with just the information that I've given here there's a few things you

Could say you could say well look my first pound of fruit I enjoy more slightly 20% more than my first chocolate bar you could also say that my second pound of fruit I enjoy it or I about the same amount of value as my

First chocolate bar you could say that my second chocolate bar enjoy less than my first chocolate bar you could even say 20% less if these numbers are good but this still doesn't give you a lot of information about how you would actually

Spend your money you might say well obviously wouldn't you would you want to just buy fruit over chocolate bars or at least that first pound of fruit over that first chocolate bar well you might but it depends on how much that fruit

Actually costs just looking at this alone we can just make relative judgments about how much we prefer each incremental bar or each incremental pound or them relative to each other but it really doesn't tell us how we would

Spend our actual money so let's think about things let's put some prices on some of these goods and think about how we would actually allocate our dollar given these marginal utility numbers right over here so let's say let's say

That let's say that the chocolate bars are one dollar one dollar per bar and let's say that the fruit is two dollars per pound two dollars per pound so this is going to be per pound this is going to be per bar and what we're going to

Think about is we're going to think about marginal utility marginal utility for that incremental chocolate bar per price of that incremental chocolate bar and here the price is going to be at $1 per pound so here for that first bar I'm

Going to be spending a dollar and I'm getting 100 marginal utility points whatever you want to call it so I'm getting a hundred marginal utility points for that dollar so I'm getting a hundred 100 marginal utility points per

Dollar here same logic I'm getting 80 marginal utility points per dollar this is pretty simple math here I'm getting 60 marginal utility points for the dollar here I'm getting 40 so that doesn't seem too interesting it might be

A little bit more interesting here what is the marginal utility per incremental fruit that I'm getting per dollar per price or actually per price of the incremental fruit here well here that first pound of fruit I'm getting 120

Marginal utility points we can call them but I paid two dollars for it so 120 120 let me write it over here so for that first incremental fruit the marginal utility for that first fruit is 120 and the price of that first

Pound of fruit is equal to two so I'm getting 60 marginal utility points per dollar I'm getting 60 here 100 marginal utility points but I'm spending $2 so that's 50 points per dollar this is 25 points per dollar this is 10 points per

Dollar now this makes things a little bit more interesting if I had five dollars to spend if I had five dollars to spend how would I how would I want to spend my $5 well where am I getting the most what you really just want to think

About where are you getting the most satisfaction for each dollar where are you getting the most bang for your buck so where am I going to spend my first dollar so dollar one so let's think about it a little bit my first dollar so

Dollar one my first dollar where I'm going to get the firt the most satisfaction per dollar well I get the most satisfaction per dollar right over here I get a hundred satisfaction units for a dollar even though I like a pound

Of fruit I'm not getting a lot I'm getting less satisfaction per dollar so I'm getting less bang for my buck so my first dollar is going to go right over there I'm going to buy one candy bar then where I'm going to spend my

Second dollar dollar – so once again I just want to look at all of my options and we're going to assume that these are only the I'm going to spend my $5 on either these two just to limit our universe once again I'm going to

Maximize my bank for rock I get 80 satisfaction points or marginal utility points over here per dollar I only get 60 over here so I'm still i'm going to buy even a second chocolate bar i am going to buy a second chocolate bar

Let's keep going where am I going to spend my third dollar now it gets a little bit interesting now it gets a little bit interesting I could spend my third dollar right over here and get 60 points per dollar or I could spend it

Over here and get 60 points per dollar we actually get the same amount these are both 60 points per dollar so I'm kind of neutral I'm gonna get the same bang for my buck whether I get another chocolate bar or whether I get another

Fruit so just for simplicity let's say I get another chocolate bar I could have got the fruit – these are really it's really a toss-up I could flip a coin and I choose to get another chocolate bar so I first spent my first

Three dollars on three chocolate bars now where am I going to spend my fourth dollar well my fourth dollar now my best bang for my buck isn't to get another chocolate bar I'm only gonna get 40

Units per buck there now it is to spend it on fruit so now the next dollar I could spend on half a pound of fruit and I would get this and then I have so my fourth dollar I could spend on this for half a pound of fruit because it's two

Dollars per pound and then I could spend my fifth dollar there too and that so this is my fourth and my fifth dollar because it's two dollars you could think of it that we're spending two dollars for one pound of fruit and we're getting

Sixty utility points per dollar so we're getting the best bang for our buck right over there but what was useful about this is it allowed us without thinking about money just saying how much do we like these

Things irrespective of their actual price and then given a certain price it allowed us to think rationally about well how would we actually spend our money in this case when chocolate bars are a dollar and fruit is two dollars

Per pound we decided to buy three chocolate bars and only one pound of fruit

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