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To understand this point, think back to the step-by-step process of finding the choice with highest total utility by comparing the marginal utility that is gained and lost from different choices along the budget constraint. As José compares each choice along his budget constraint to the previous choice, what matters is not the specific numbers that he places on his utility—or whether he uses any numbers at all—but only that he personally can identify which choices he prefers.

In this way, the step-by-step process of choosing the highest level of utility resembles rather closely how many people make consumption decisions. We think about what will make us the happiest; we think about what things cost; we think about buying a little more of one item and giving up a little of something else; we choose what provides us with the greatest level of satisfaction. The vocabulary of comparing the points along a budget constraint and total and marginal utility is just a set of tools for discussing this everyday process in a clear and specific manner. It is welcome news that specific utility numbers are not central to the argument, since a good utilimometer is hard to find. Do not worry—while we cannot measure utils, by the end of the next module, we will have transformed our analysis into something we can measure—demand.

Key concepts and summary

Economic analysis of household behavior is based on the assumption that people seek the highest level of utility or satisfaction. Individuals are the only judge of their own utility. In general, greater consumption of a good brings higher total utility. However, the additional utility received from each unit of greater consumption tends to decline in a pattern of diminishing marginal utility.

The utility-maximizing choice on a consumption budget constraint can be found in several ways. You can add up total utility of each choice on the budget line and choose the highest total. You can choose a starting point at random and compare the marginal utility gains and losses of moving to neighboring points—and thus eventually seek out the preferred choice. Alternatively, you can compare the ratio of the marginal utility to price of good 1 with the marginal utility to price of good 2 and apply the rule that at the optimal choice, the two ratios should be equal:

MU 1 P 1 = MU 2 P 2

Problems

Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers. Praxilla gets 30 units of marginal utility from her first poem, 27 units of marginal utility from her second poem, 24 units of marginal utility from her third poem, and so on, with marginal utility declining by three units for each additional poem. Praxilla gets six units of marginal utility for each of her first three cucumbers consumed, five units of marginal utility for each of her next three cucumbers consumed, four units of marginal utility for each of the following three cucumbers consumed, and so on, with marginal utility declining by one for every three cucumbers consumed. A poem costs three bronze coins but a cucumber costs only one bronze coin. Praxilla has 18 bronze coins. Sketch Praxilla’s budget set between poems and cucumbers, placing poems on the vertical axis and cucumbers on the horizontal axis. Start off with the choice of zero poems and 18 cucumbers, and calculate the changes in marginal utility of moving along the budget line to the next choice of one poem and 15 cucumbers. Using this step-by-step process based on marginal utility, create a table and identify Praxilla’s utility-maximizing choice. Compare the marginal utility of the two goods and the relative prices at the optimal choice to see if the expected relationship holds. Hint : Label the table columns: 1) Choice, 2) Marginal Gain from More Poems, 3) Marginal Loss from Fewer Cucumbers, 4) Overall Gain or Loss, 5) Is the previous choice optimal? Label the table rows: 1) 0 Poems and 18 Cucumbers, 2) 1 Poem and 15 Cucumbers, 3) 2 Poems and 12 Cucumbers, 4) 3 Poems and 9 Cucumbers, 5) 4 Poems and 6 Cucumbers, 6) 5 Poems and 3 Cucumbers, 7) 6 Poems and 0 Cucumbers.

Got questions? Get instant answers now!

References

U.S. Bureau of Labor Statistics. 2015. “Consumer Expenditures in 2013.” Accessed March 11, 2015. http://www.bls.gov/cex/csxann13.pdf.

U.S. Bureau of Labor Statistics. 2015. “Employer Costs for Employee Compensation—December 2014.” Accessed March 11, 2015. http://www.bls.gov/news.release/pdf/ecec.pdf.

U.S. Bureau of Labor Statistics. 2015. “Labor Force Statistics from the Current Population Survey.” Accessed March 11, 2015. http://www.bls.gov/cps/cpsaat22.htm.

Questions & Answers

what is supply
Mizta Reply
what is opportunity cost
Mizta
The opportunity gained interms of opportunity lost is known as opportunity cost Or The second best alternative use of resources
Mir
forgone alternative: like forgoing Something our of two to buy one
Tam-Waribo
what is macro economic s
Addo Reply
macroeconomics is the study of economic as a whole level.
Gafar
meaning of positive science
Sumit Reply
positive science it is focused on facts and cause and effect and behavioural relationship and include developmental testing in economic theoreis.
Gafar
what is inflation
Sama Reply
inflation is the general price increase of goods and services in an economy.
tesfie
Inflation is the persistent rise in the general price level
T-Max
inflation is characterized by increase in the general price of goods and services. when there is too much money in circulation. increase in demand of goods pursuing fewer goods. when purchasing power of money decreases .
Ejikeme
inflation is the persistent rise general price level
Habeeb
inflation is the persistent increase in price
Machall
hi
Rafiu
yes
boston
hi
Ayaan
how are you
Ayaan
increase in the general level of price...
sade
what is deflation
Sele
is the gradual decrease of currency exchange in a country.
Gafar
different between demand and quantity demand
Farhan Reply
No difference
MansoorAfghan
demand is the overall demand for it
MansoorAfghan
actually theres no difference
MansoorAfghan
quantity demanded is used in Equilibrium of d and s
MansoorAfghan
for evrything else u use deman
MansoorAfghan
the difference of it is that when demand simply denotes the willingness and a person's ability to purchase. And as against quantity demand represent the amount of an economic good or services desire by a consumer at a fixed price .☺
Gafar
how to calculate inflation
Richard Reply
Explain the factors that have led to high quantity demanded
Ogwang Reply
price of the product increase of price substitute product as people shift to cheap one
Black
what are the methods used by trade union to increase wages of their members?
Black Reply
strike
Pearl
the size of the commodity
Mensah
increase demand of labour decrease supply of labour
Black
I do support your answer Jackel.
keshav
but how do they do it?
Black
by increasing more labour and reduced the suppliers
Mensah
they can not increase labour, they increase demand of labour.
Black
how do they increase demand for labor?
Black
by analyzing the market equilibrium , cost reduction and cost control , savings in time .
yash
decreasing supply of labour are achieved through training and certification that require for you to employed, you must have certificate, also trade union encouraged government to restrict migration into the country causing shortage of labour supply. Note that the aim of union is to enhance life
Black
objective of union: better working conditions, liveable wage, protect member from unfair treatment which are done through negotiations betweens representative and management. known as collective bargaining.
Black
what is the nature of economics?
Tyscar Reply
economics is a social science since it seeks to solve social problem of scarcity
Jamal
main concerns is the decision individuals make on the allocation of scarce resources among the competing wants
Black
in the short run firm produce a positive as long as the price is larger than what?
yoel Reply
what is economic
Bah Reply
economics is the study of managing the resources in order to maximize the needs and satisfy the wants to a great extent in a regulated set-up..
Muhammad
One explanation for deviation when there is no impact on balance of trade
Shaneel
economic s is a social science that deals with human behavior as a relationship between ends and scarce means which has alternative uses
Derokiz
economic is a study of mankind in ordinary business of life
FIDELIS
economics it is the study of social science that deals with human behaviour as relationship between ends and scarce means which have alternative uses
salam
Economic is the use of scarce recourses to attain economic dough effectively and efficiently.
Addo
economics is the study of how humans make decisions in the face of scarcity. Eg. family decision, individual decision, and societal decision.
Gafar
what is diminishing returns
Blessed Reply
what is the difference between calculus linear equation and derivative?
Bti
whats inferior goods?
jaamac Reply
Good having low quality , also known as giffin goods. When income increases people shift to better quality goods . Hence having a negative effect on inferior goods rather than positive relation ( ie when income increases demand increases but not in case of inferior goods ) example wheat and bajra .
yash
What do u understand by the word ENDS in professor Lord L C Robinson definition of Economics?
Kaba Reply
I understand that ENDS is the unlimited needs of human. But we have limited resources to achieve our unlimited needs/wants. Thank you.
Midhun
variable is a factor that can change
nyodb Reply
did you understand definition of variablE
nyodb

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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