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Utility:
A Measure of the Amount of
SATISFACTIONA Consumer Derives fromUnits of a Good
Chapter 5: Utility Analysis
Utility as a basisfor Demand
David's Utility Schedule for Hamburgers
0 01 62 113 154 185 206 217 21.1
Number Total Utility
Diminishing Marginal Utility:
Each ADDITIONAL hamburgerProduces Less and Less
ADDITIONAL SATISFACTION
David's Utility Schedule for Hamburgers
0 01 62 113 154 185 206 217 21.1
Total Utility Marginal Utility
(6-0)/1 = 6
(11-6)/1 = 5(15-11)/1 = 4(18-15)/1 = 3(20-18)/1 = 2(21-20)/1 = 1(21.1-21)/1 = 0.1
Each additional hamburgerproduces less and less additional utility
Number
Indifference Curve:All Possible Combinationsof Two Goods that Producethe Same Amount of Total Utility
An Indifference Curve: The consumer isequally happy (satisfied) at any of the points along a single curve
An Indifference Curve represents the same amount of utility everywhere
Indifference Curvefor OneUtility Level
"Convex to the Origin"Preference For some of bothHamburgers and French Fries
Indifference Curvesfor each Utility Level
Indifference curves never touch or intersect each other
Indifference Map
utility level 1
utility level 2
utility level 3
utility level 4
More Utilit
y
Budget LineAssume:
Price of Hamburger is $1.00Price of French Fries is $.50Income is 7.50
Could Purchase 7.5 Hamburgers0 French Fries
or 15 French Fries, 0 Hamburgers9 French Fries, 3 Hamburgersor
Many other feasible combinationswith the $7.50 of income
Budget Line for $7.50 Income
Combinations of Hamburgers & French Fries
that can be Purchased for $7.50
An Indifference Curve and Budget Line
Specific utility level
3
Point of Tangency between Budget Line and Indifference Curve Determines Optimum Quantities ofHamburgers and French Fries
utility level 2
utility level 3
utility level 4
utility level 5
Indifference Curve Map
utility level 1
9
Price of Hamburgers /Price of French Fries= Slope of Budget Line
Marginal Rate of Substitutionof Hamburgers for French Fries= Slope of Indifference Curve
Optimum Combination: 3 Hamburgers, 9 French Frieswhere
Price of Hamburgers/Price of French Fries =Marginal Rate of Substitutionof Hamburgers for French Fries
Impact of More Income
A new, higher budget line
with the same slope
but reaches a higher indifference curve
Budget Line for $7.50 and $12.50 Income
$12.50
$7.50
Impact of Price Changefor Hamburgers
Hamburgers
Special Today
All you can eat
50 cents each
Hamburgers
$3.75 each
Price of Hamburgers decreases to $.50
9 Hamburgers x $.50 = 4.50
6 French Fries x $.50 = $3.00
still spent $7.50 total
9
6
Price of Hamburgers now $3.75
How many French Fries ??
Quantity of Hamburgers now taken: 1
Tracing the Demand Curve for Hamburgers
Price Quantity Demanded
3.75 11.00 30.50 9
.5
1.00
3.75
1 3 9
Price of
Quantity Demanded per unit of time
Demand
A Demand Schedule for Hamburgers
Hamburgers
Consumer demand has its roots
in consumer utility theory
Price
Quantity/ unit of time
D
