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Maximizing Utility in Consumer Choices: Equi-Marginal Utility Principle

Understand consumer behavior and maximize utility by applying the Equi-Marginal Utility Principle. Learn how price changes affect consumption decisions and the relationship between prices and marginal utilities in various scenarios.

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Maximizing Utility in Consumer Choices: Equi-Marginal Utility Principle

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  1. Example :Consumer consuming bottles of coke

  2. Recap On Scarcity and Choice

  3. Recap

  4. b a TU c b TU a c 9 x x MU MU

  5. POINT 1 b TU a TU c 9 x MU MU

  6. POINT 2 TU MU

  7. POINT 3 TU b a c x MU

  8. POINT 4 b b TU TU a ∆ U a ∆ U c ∆ Q ∆ Q c 9 x x MU MU

  9. POINT 5 TU b a c x 11/2 MU 1/2

  10. TU = 60Q – 4Q2

  11. People will consume until MU = P Hence when MU > P consumers will increase consumption until MU = P Also when MU < P consumers will decrease consumption until MU = P

  12. A C B D • IMPORTANT POINTS • OACD = Total Utility • OBCD = Total Revenue • ABC = Total Consumer Surplus

  13. A A Price Curve Shifts up C B C B D D O IMPORTANT POINT 1. As the price curve shifts up Q falls ,hence MU curve is also the demand curve. 2. As P rises TCS shrinks and when P goes down TCS rises.

  14. Case of chicken & beef • When we say that chicken gives 3 times the satisfaction of Beef, we are in fact saying: MUc = 3 MUb 1 • & When Chicken costs twice as much as beef : Pc = 2 Pb 1 • Generalizing for X & Y MUx > Px MUy Py The consumer will increase buying X and less Y until MUx = Px MUy Py

  15. Comparing the ratios of their marginal utilities to their prices. MUc > MUb Pc Pb • Spend more on chicken and less on beef; as a result MUc will fall and MUb will rise until MUc = MUb Pc Pb NOTE: This is the same equi–marginal utility principle stated earlier.

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