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Econ 1 - Top-4

# Econ 1 - Top-4 - Econ 1 PRINCIPLES OF MICROECONOMICS Foster...

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Law of Diminishing Marginal Utility As a person consumes more of a given commodity per time period, holding consumption of other commodities at constant levels, the extra satisfaction obtained from each extra unit falls. Econ 1 – PRINCIPLES OF MICROECONOMICS LECTURE NOTES Foster, UCSD 13-May-09 TOPIC 4 – UTILITY & VALUE A. Utility Functions and Basic Definitions 1. Introduction to Utility: a) Utility and “purposive behavior.” 1) People consume goods and engage in economic activity to satisfy wants and needs. 2) Utility = level of satisfaction obtained. 3) Utility is a very general concept, not confined to pleasure or usefulness. b) Measuring utility. 1) Pretend (for now) that we can measure utility in an imaginary unit called a util. 2) Later on, you will learn that utility can only be measured ordinally , not cardinally , and that one person's utils can never be compared to another's. 2. Utility Functions: a) Total utility function U = u(A, B,...). 1) Utility depends upon quantities of goods A, B, ... consumed/time period. 2) The particular algebraic form is a mathematical representation of a person's tastes and preferences. b) Marginal utility. 1) Whenever you see "marginal" in economics, think "one unit more or one unit less." 2) The marginal utility of a specific commodity is the extra satisfaction that a consumer would obtain by consuming one extra unit of that commodity per time period, holding consumption levels of all other commodities constant. It is also the amount of utility a consumer would give up if he/she consumed one less unit per time period. 3) When working with tables, use MU a ≈ ΔU/ΔA. 3. The Law of Diminishing Marginal Utility: a) Verbal statement. This does not say that total utility declines or that MU is negative. It merely says that MU (which is usually positive) gets smaller as consumption increases.

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Ec 1 UTILITY p. 2 b) Satiation. 1) We say that a person is satiated with a commodity if they are already consuming so much that additional units would not increase utility. 2) At a point of satiation, MU is zero, and if the consumer were forced to consume even more, MU may become negative (causing total utility to fall). c) Tabular example -- Skip's utility depends only on ice cream cones consumed per week (x). 1) Note that the 1 st ice cream cone adds more to total utility than the 2 nd , which added more than the 3 rd , and so forth. MU is positive but falling from the beginning. 2) In this example, satiation is reached at 5 ice cream cones a week, because MU = 0 at x = 5. Any further increases in ice cream consumption do not make the consumer any better off, and in fact might make utility fall (MU becomes negative) if more ice cream would make him sick.
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