What I wanna do in this video is think about a concept
that we've already thought about multiple times
in the context of many many videos
and this is the idea of utility
which is really just a way of saying
how much benefit, or satisfaction, or value
do you get out getting a good or service
but the angle that we're gonna take in this video
is gonna be slightly different
in the past when we were measuring benefit or value
we either measured in term of dollars
or we said hey
the benefit of getting an incremental Honda Civic
was 5,000 dollars
and when we're talking about incremental
we're talking about the marginal benefit
or early on, when we talked about
the production possibilities frontier
and when we talked about the marginal benefit
of getting another squirel
we were talking about it in terms of berries
we were talking in terms of another good or service
but what we're gonna do in this video
is just think about it in absolute terms
we're just gonna think of some arbitrary way
of measuring utility
and then just assign values to
what's the value of getting one chocolate bar
and then what's the value that we give
to the next chocolate bar and chocolate bar after that
we're gonna do the same things about fruit
and from that we're gonna see
if we can kind of built up some the things
that we already know about demand curves
and how things relate to price
and the price of other goods and things like that
and in particular we're gonna focus on marginal utility
so obviously you could have total utility
if I have four chocolate bars you could say that
the total utility I am getting from all four of them
or you can think of the marginal utility
the utility I am getting
from the next incremental chocolate bar
or the next incremental pound of food
and before I move on there's one thing
this was a point of confusion for me
when I first learned this
ok I am using the word marginal utility now
-in the past I've used the word marginal benefit-
they sound very similar
in fact I even used the word benefit
when I defined marginal utility
How are these things different?
And the simple answer is
conceptually they aren't
conceptually they are the exact same thing
though the difference is
how the words tend to be used
in the context of traditional microeconomics class
so when people talk about utility
they tend to measure
in terms of some type of absolute measure
that they just came up with
some type of you could view it as utility units
some type of satisfaction units
while when they talk about marginal benefit
they tend to measure it
either in dollars or in terms of some other goods
but I've seen either term used either way
so they really do mean the exact same thing
but in this video we're gonna use the term utility
and we're gonna come up with measuring scale
and it's somewhat arbitrary one
and we're gonna use that
to come up with some conclusions
about the basket of goods someone might purchase
depending on different prices
so as you can imagine, I prewrote these two things
we're gonna talk about chocolate bars
and we're gonna talk about fruit
so right here in these little tables here
I've shown the marginal utility of each incremental bar
and in case of fruit of each incremental pound of fruit
so this is saying that first chocolate bar
obviously if I have no chocolate bars
I am getting no utility from chocolate bars
and this is saying that the first chocolate bar
has a marginal utility
so the utility of that next icnremental one is a hundred
I'm not saying a hundred dollars
I'm not saying
it's equivalent to a hundred pounds of fruit
I'm not saying it's equivalent to a hundred berries
I'm just saying arbitrarily saying it is a hundred
and what matters is not that
this is a hundred or thousand or million
what matters is how this compares to others things
so for example
if I would say that this is a hundred
and if I know that I like fruit
a pound of fruit 20 percent more than that first
or if I like an incremental
-my first pound of fruit-
20 percent more
then I would have to say that the marginal utility
of my first pound of fruit is 120
and this is what we said right over here
and if another way to think about it is
if the marginal utility of the second chocolate bar I get
because I've already enjoyed a little bit of chocolate bar
and I am a little "chocolated" out
is 20 percent less than that
then if this is a hundred that this would have to be 80
I could have said this to be 1000
and this to be 800
and this to be 1200
I could have said this to be 10
and this to be 8
and this to be 12
what matters is that
they really just have the same ratios between them
that really do reflect much actual preferences
so let's just think about this a little bit
my first chocolate bar I am pretty excited
I just call it a hundred
the next chocolate bar
I am a little bit less excited about it
I've already had some chocolate
my craving has been satiated to some degree
but I still like chocolate so I'll call that an 80
we can call it 80 satisfaction units
whatever you wanna call it
then the next chocolate bar after this
now I am starting to get pretty stuffed
and I am really "chocolated" out
and so I am not getting as much benefit from it
and then finally if you give me another chocolate bar
it's even less
and if we were to list fifth chocolate bar
I might not want it at all
my marginal utility might go to zero
for that fifth chocolate bar
maybe for that sixth chocolate bar
I have to somehow get rid of it
I am so tired of chocolate bars
maybe I have a negative marginal utility
and we can think about the same thing with fruit
the first pound of fruit
I am pretty excited about fruit
I have a fruit craving
I like that first pound of fruit
even more than that first chocolate bar
I like it 20 percent more
so I get 120, you could call it utility points
or whatever arbitrary you want to call it
then my next pound of fruit
once again, I am having diminishing utility
diminishing benefit
as I get more and more incremental pound of fruit
now, it's very important to realize
this is marginal utility
not total utility
this is the utility I am getting from each incremental pound
it's positive
so I am still enjoying that next incremental pound
I am just enjoying it little bit less than the pound before
and to realize what total utility is
if I were to have to pounds of fruit
I would get 120 of utility from that first pound
and I would get a 100 from that second pound
and so you would say I had a total utility of 220 utility units
from both pounds
now with just the information that I've given here
there are few things you could say
you could say well look
my first pound of fruit I enjoy more
20 percent more
than my first chocolate bar
you could also say my second pound of fruit
I derive about the same amount of value
as my first chocolate bar
you could say that my second chocolate bar
I enjoy less than my first chocolate bar
you could even say 20 percent less
if these numbers are good
but it still doesn't give you a lot of information
about how you would actually spend your money
you might say
obviously wouldn't you just want to buy fruit
over chocolate bars
or at least that first pound of fruit
over that first chocolate bar?
well you might
but it depends on how much fruit actually cost
just looking at this alone
we can just make relative judgements
about how much we prefer each incremental bar
or each incremental pound
or them relative to each other
but it really doesn't tell us
how we would spend our actual money
so let's think about things
let's put some prices on some of these goods
and think about we would actually allocate our dollars
given these marginal utility numbers right over here
so let's say that the chocolate bars are 1 dollar per bar
and let's say that the fruit is 2 dollars per pound
2 dollars per pound
so this is going to be per pound
and this is going to be per bar
and what we're gonna think about is
we're gonna think about marginal utility
for that incremental chocolate bar per price
of that incremental chocolate bar
here the price is gonna be at a dollar per pound
so here for that first bar
I am going to be spending a dollar
and I am getting a hundred marginal utility points
whatever you want to call it
so I am getting a 100 marginal utility points
for that dollar
so I'm getting a hundred
a hundred marginal utility points per dollar
Here, same logic
I am getting 80 marginal utility points per dollar
this is pretty simple math
here I am getting 60 marginal utility points for the dollar
her I am getting 40
so that doesn't seem too interesting
it might be a little bit more interesting here
what is the marginal utility per incremental fruit
that I am getting per dollar
per price
or I should say per price of the incremental fruit here
well here, the first pound of fruit
I am getting 120 marginal utility points
but I paid 2 dollars for it
so 120, let me write it over here
so for that first incremental fruit
the marginal utility for that first fruit is 120
and the price for that first pound of fruit is equal to 2
so I am getting 60 marginal utility points per dollar
I'm getting 60
here 100 marginal utility points
but I am spending 2 dollars
so it's 50 points per dollar
this is 25 points per dollar
this is 10 points per dollar
now this makes things a little bit more interesting
if I had 5 dollars to spend
how would I want to spend my 5 dollars
well where am I getting the most
you really want to just think about
where you're getting the most satisfaction for each dollar
where you're getting the most bang for your buck
so where am I going to spend my first dollar
so dollar one:
let's think about it a little bit
my first dollar
so dollar one:
my first dollar
where am I going to get the most satisfaction per dollar
well I get the most satisfaction per dollar right over here
I get a 100 satisfaction units per dollar
even though I like a pound of fruit more
I am getting less satisfaction per dollar
so I am getting less bang for my buck
so my first dollar is going to go right over there
I am going to buy one candy bar
then where am I going to spend my second dollar
dollar two:
so once again, I just wan to look at all my options
and we're gonna assume that
I am going to spend my dollar on either of these two
just to limit our universe
once again I am gonna maximize my bang for buck
I get 80 satisfaction points
or marginal utility points over here per dollar
and I only get 60 over here
so I am gonna buy a second chocolate bar
let's keep going
where am I gonna spend my third dollar
now it gets a little bit interesting
I could spend my third dollar right over here
and get 60 points per dollar
or I could spend it over here
and get 60 points per dollar
I would actually get the same amount
these are both 60 points per dollar
so I am kind of neutral
I am getting the same bang for my buck
whether I get another chocolate bar
or whether I get another fruit
so just for simplicity
let's say I get another chocolate bar
I could have got the fruit too
so it's really a toss-up
I could flip a coin
and I choose to get another chocolate bar
so I spent my first three dollar on three chocolate bars
now, where am I going to spend my fourth dollar
well my fourth dollar
now my best bang for my buck
isn't to get another chocolate bar
I am only going to get 40 points per buck there
now it is to spend it on fruit
so now the next dollar I could spend on half a pound of fruit
and I would get this
so my fourth dollar, I could spend on this
for half a pound of fruit
because it's two dollars per pound
and then I could spend my fifth dollar there too
so this is my fourth and my fifth dollar
because it's two dollars
you could think of it we're spending
2 dollars for one pound of fruit
and we're getting 60 utility points per dollar
so we're getting the best bang for our buck right over there
but what was useful about this is that it allowed us
without thinking money
just say how much do we like these things
irrespective of their actual price
and then given a certain price
it allowed us to think rationally
about how would we actually spend our money
in this case when chocolate bars are a dollar
and fruit is two dollars per pound
we decided to buy three chocolate bars
and only one pound of fruit