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UMass Amherst ECON 103 - Class 9 Marginal Utility Fall 2014

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Slide 1Slide 2Slide 3Are two dogs better than one?Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10How many times have you read the Harry Potter booksSlide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29WinslowMax and Ruby as babiesDallasAre two dogs better than one?Marginal utilityWhy individual’s demand curves are often downward sloping.Whatever that means.The big picture•We get pleasure from things. But we get sated and get less and less additional pleasure the more we already have. This is diminishing marginal utility.•Because of this, we will buy more of anything only at ever decreasing price. Individual demand curves are downward sloping.•In the orthodox model, aggregate demand curves are the sum of the individual curves. This requires an extreme assumption of independence of individual choice.Marginal utility diminishes because of satiation“Marginal utility” is the extra pleasure we get from consuming one more thing.It diminishes because we become “sated” – we have had enough.I could never tire of some thingsMarginal Utility diminishesThe more you have, the less you want more.The first time is GREAT!!!The second time is Wonderful!The third time is really good.The fourth time is nice.The fifth time . . . “I have a headache”Things are less exciting when you have a lot.Even sex, drugs and rock and roll get old.Would you ever get tired of . . . Chocolate? 1.Yes: enough is enough.2.No: I could never get enoughI could have asked about other things. But I don’t think that the administration would approve.How many times have you read the Harry Potter booksOnce? Twice?Three times? More?Why did you stop?Who stopped?Beowulf gets bored when I talk about EconomicsMy daughters also get bored. But they don’t get pictures. Quick: ARE YOU BORED?A graph of diminishing marginal utilityAbout here you barfHow much will you drink?I hope not this muchI suspect that diminishing returns set in a while ago. So why did he keep drinking? Even if the drinks were free, shouldn’t he have stopped?Drink until MU = cost of wineDrink whenever the MU is at least as great as the cost.Don’t drink where MU is less than the costThe Faux punchline: Demand curve is downward slopingYour individual demand curve for wine is downward slopingBuy where MU=price. Higher prices, higher MU, less wine. Lower prices, lower MU, more wine.Careful: This does not mean that the community’s demand curve is downward sloping!Not all products have diminishing marginal utilityBe careful of those that don’t; unless you like rehab.If everyone acts the same in society as they would outside, then total demand at any price would be the sum of individual demandsHint: People are not like this!The orthodox idea:Assuming that everyone is alike, and no one influences anyone else, the aggregate demand curve is the sum of individual demand curvesThis way we need to know only one thingHow one person values things. The orthodox assume everyone else is the same; and the total is the sum of all the individuals.Are we all like him?Aggregation works for sociopaths•Our consumption is completely asocial; it is between us and a material good without any social interaction. Masturbation not sex.•We have perfect knowledge of what we are buying, or, at least, are not at all influenced by others.It works if you live in a shell.If these conditions do not hold, then aggregate demand curves may not slope downAnd raising prices may increase demand for a product. That would be strange.Life is like that sometimes.Robinson Crusoe’s life was strangeHe lived all alone.But, at least his demand curves sloped down.PQRobinson Crusoe’s demand for coconutsHow much would you pay for the third scoop of coconut ice cream?1. Less than the first.2. The same as the first.3. More than the first because I found that I really like it!4. Never had it; don’t know.Here’s how you figure it outYou will pay up to the MU for that scoop.MU is the change in total utility.The MU of the first is $15.The MU of the second is the change, or $27-15= $12.The MU of the third is $36-27 = $9.You will pay $9 for the third scoop.ScoopTotal pleasureMarginal utility1 $15 2 $27 3 $36 4 $42 5 $45 6 $45 7 $42 8 $36Another oneRoses Happiness Marginal Utility1 $16.00 $16.00-0=$16.002 $30.50 $30.50-16.00=$14.503 $43.50 $43.50-30.50=$13.004 $55.00 $55.00-43.50=$11.505 $65.00 $65.00-55.00=$10.006 $73.50 $73.50-65=$8.507 $80.50 $80.50-73.50=$7.008 $86.00 $86.00-80.50=$5.509 $90.00 $90.00-86.00=$4.0010 $92.50 $92.50-90.00=$2.50Girls love them.Demand curve: how much you will buy at any priceAt $15 you will buy only one scoop.At $12, the second scoop is a good buy.At $3, you’ll buy 5 scoops. (Maybe give one to the dog.)Your demand is the same as your MU.How much will the community buy?If there are 100 people, and you assume that they are all like you, then multiply the number of scoops at any price by 100!You Community Price1 100 $15 2 200 $12 3 300 $9 4 400 $6 5 500 $3Take-away points•Marginal utility slopes down because of satiation.•Individual demand curves slope down because of diminishing marginal utility.•If we are not influenced by what others do, then aggregate demand curves are the sum of individual demand


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