Diminishing Marginal ValueMarginal ValueSubstitution and MVSubstitution and MV (cont’d)Gains from tradeGains from trade (cont’d)Slide 7Slide 8Total Value (TV)Example.MV and TV (cont’d)What motivates individual behavior?No exceptionsApplication:SummaryDiminishing Marginal ValuePRINCIPLE #3.Marginal ValueMarginal Value (MV): -The maximum amount of one good an individual is willing to sacrifice to obtain one more unit of another good-Maximum willingness to pay for the next unit of a goodSuppose Skippy and Myrtle are in d ifferent between the bundles:Substitution and MVSkippy MyrtleBlu rays mp3s Blu rays mp3s10 50 2 10011 35 3 7512 25 4 55MV of blue ray expressed in terms of mp3s sacrificed:Substitution and MV (cont’d)Skippy MyrtleBlu rays mp3s MV Blu rays mp3s MV10 50 2 10011 35 15 3 75 2512 25 10 4 55 20Gains from trade•Suppose both start with the “middle” bundleSkippy MyrtleBlu rays mp3s MV Blu rays mp3s MV10 50 2 10011 35 15 3 75 2512 25 10 4 55 20Gains from trade (cont’d)•Myrtle willing to give up 20 mp3s for 4th Blu ray•Skippy willing to give up 11th Blu ray for 15 mp3sSkippy MyrtleBlu rays mp3s MV Blu rays mp3s MV10 50 2 10011 35 15 3 75 2512 25 10 4 55 20Gains from trade (cont’d)Suppose they agree on a price of 17 mp3s for 1 Blu RaySkippy MyrtleBlu rays mp3s MV Blu rays mp3s MV10 5210 50 2 10011 35 15 3 75 2512 25 10 4 55 204 58Gains from trade (cont’d)•Both Skippy (10, 52) and Myrtle (4, 58) are better off with trade!Total Value (TV)Total Value:The sum of the marginal values – the maximum one is willing to pay for a particular quantity of a goodExample.I love oranges. Suppose the value I put on the first unit of oranges is $4.75. The second is $4.25. The third is $3.75 and the fourth is $3.25. What is the Total Value I put on consuming 4 units?TV = MV1 + MV2 + MV3 + MV4 = 4.75 + 4.25 + 3.75 + 3.25 = $16MV and TV (cont’d)Marginal value is the change in total value arising from a change in quantity:MV = Total Value = ΔTV / ΔQ QuantityWhat motivates individual behavior?PRINCIPLE #3. Diminishing Marginal Value:The more you have of something the less you are willing to pay for itNo exceptions•Like Maximization and Substitution, the law of Diminishing Marginal Value is universalApplication:•Is everything amazing?•Why do we jump off cliffs?Summary•The more we have of something, the less we value it•This proposition is universal – no
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