Changes

Giffen goods are exceptions to the Law of Demand ... if Giffen goods really exist!  Many, including your teacher, are skeptical that there really is such a thing as a Giffen good.

Giffen goods are exceptions to the Law of Demand ... if Giffen goods really exist!  Many, including your teacher, are skeptical that there really is such a thing as a Giffen good.

==Utility==

==Utility and Diminishing Returns==

Money isn’t everything.  We have many expressions for this concept.  “There’s more to life than money.”  “It’s only money.”  “What’s your job satisfaction?” The basic point is that dollars and cents do not capture our overall happiness or satisfaction as a consumer.  You may buy the most expensive music CD on the market, or watch the most popular movie, or buy the fanciest clothes, but that does not mean you will like those items the best.  Often our favorite goods are not the most expensive ones.

Money isn’t everything.  We have many expressions for this concept.  “There’s more to life than money.”  “It’s only money.”  “What’s your job satisfaction?” The basic point is that dollars and cents do not capture our overall happiness or satisfaction as a consumer.  You may buy the most expensive music CD on the market, or watch the most popular movie, or buy the fanciest clothes, but that does not mean you will like those items the best.  Often our favorite goods are not the most expensive ones.

“Utility” is concept created to address that need.  “Total utility” is defined as a consumer’s overall satisfaction.  In addition, “marginal utility” is defined as the additional satisfaction of a consumer in buying an additional unit of a good.

“Utility” is concept in economics created to include non-monetary satisfaction.  '''''“Total utility” is defined as a consumer’s overall satisfaction'''''.  “Marginal utility” is defined as the additional satisfaction of a consumer in buying an additional unit of a good.

Economics is not only about money.  The economic concept of “utility” encompasses everything worthwhile whether it has to do with money or not.  Helping someone has “utility”, for example, even though it is voluntary and not for money.  Charity has utility even though nothing is obtained in return.

As we discussed in Lecture One, Economics is not only about money.  The economic concept of “utility” encompasses everything worthwhile whether it has to do with money or not.  Helping someone has “utility”, for example, even though it is voluntary and not for money.  Charity has utility even though nothing is obtained in return.

Let’s take an example.  Suppose you are on a family road trip by car out West.  You left your campsite near Phoenix just after you woke up, and you’re driving through the desert to Los Angeles.  You have not eaten all day.  Hour by hour goes by and you do not see any place to eat.

Let’s take an example.  Suppose you are on a family road trip by car out West.  You left your campsite near Phoenix just after you woke up, and you’re driving through the desert to Los Angeles.  You have not eaten all day.  Hour by hour goes by and you do not see any place to eat.

Finally, at 4 in the afternoon, you see the golden arches of McDonalds appear on the horizon.  You drive closer and the arches appear bigger.  It’s not a mirage.

Finally, at 4 in the afternoon, you see the golden arches of McDonalds appear on the horizon.  You drive closer and the arches appear bigger.  It’s not a mirage!

When you arrive, you run in and order its famous french fries.  You’re famished.  When the food arrives, you take your first handful of french fries.  They seem delicious to you.  Your marginal utility is extremely high.  You might have paid $10 for that first mouthful of french fries because you are so hungry.  Then you eat your second handful of french fries.  Your marginal utility is still high, but not quite as high as the first one.  You wouldn’t have paid as much for the second bit either, perhaps.  By the time you finish all the french fries, the last few bites were not so satisfying.  In fact, you’ve gotten sick to your stomach.  The marginal utility of that last french fry was very low.  Perhaps even less than zero!

When you arrive, you run in and order its famous french fries.  You’re famished.  When the food arrives, you take your first handful of french fries.  Wow, it is really satisfying to to eat that first bunch of french fries with an empty stomach.  Your marginal utility is extremely high.  You might have even been willing to pay $5 for that first mouthful of french fries because you are so hungry.  Then you eat your second handful of french fries.  Your marginal utility is still high, but not quite as high as the first one.  You wouldn’t have paid as much for the second handful either.  By the time you finish all the french fries, the last few bites were not so satisfying.  In fact, you’ve gotten sick to your stomach.  The marginal utility of that last french fry was very low.  Perhaps even less than zero!

You have just experienced the '''''Law of Diminishing Marginal Utility''''': the marginal utility of each additional unit (e.g., french fry) always declines (in a given period).

You have just experienced the '''''Law of Diminishing Marginal Utility''''': the marginal utility of each additional unit (e.g., french fry) always declines (in a given period).  Sometimes this is simply called "Diminishing Returns," where "returns" refers to the value received by you.

In general, the rational consumer will always try to maximize his or her total utility.  How is this done?  The consumer always purchases the good with the highest marginal utility in order to maximize the total utility.

In general, the rational consumer will always try to maximize his or her total utility.  How is this done?  The consumer always purchases the good with the highest marginal utility in order to maximize the total utility.

Suppose you go to a shopping mall with $80.  You can buy food or clothes or anything else you find in a mall.  Would you spend it all on food?  Of course not.  The marginal utility of your food purchases declines as you eat more.  Ideally, you wouldn’t even buy enough food to fill your stomach, because you can always eat more cheaply at home.  To maximize your utility, you would spend every dollar in a way that has the most marginal utility.  Your first purchase would be what you want most, and then your next purchase would be your second choice, and so on.  If you really want something that costs $80, then you may spend all your money on that one item.

Suppose you go to a shopping mall with $80.  You can buy food or clothes or anything else you find in a mall.  Would you spend it all on food?  Of course not.  The marginal utility of your food purchases declines as you eat more.  Ideally, you wouldn’t even buy enough food to fill your stomach, because you can always eat more cheaply at home.  To maximize your utility, you would spend every dollar in a way that has the most marginal utility.  Your first purchase would be what you want most, and then your next purchase would be your second choice, and so on.  If you really want something that happens to cost $80, then you may spend all your money on that one item.

The rational consumer maximizes utility by spending each dollar in a way to maximize marginal utility for that dollar.  For such a consumer, the marginal utility of every good divided by that good’s price must be equal.  MUx/Px = MUy/Py=MUz/Pz, where MUx is the marginal utility of good “x” and Px is the price of good “x”.  This is known as the Law of equiproportion marginal benefit.

The rational consumer maximizes utility by spending each dollar in a way to maximize marginal utility for that dollar.  For such a consumer, the marginal utility of every good divided by that good’s price must be equal.  MU_x/P_x = MU_y/P_y=MU_z/P_z, where MU_x is the marginal utility of good “x” and P_x is the price of good “x”.  This is known as the Law of Equiproportion Marginal Benefit.

It is impossible for anyone else to measure your utility, or for you to try to compare your total utility to that of other consumers.  What you can do is decide for yourself which goods and prices give you the greatest utility, and then buy accordingly.  That may include political and religious views in addition to pure dollars and cents.  For example, some conservatives boycott companies that fund [[abortion]], regardless of how inexpensively those companies sell their goods.  Such a boycott maximizes the participants’ utility, but not their savings.  Many other boycotts have occurred in American history based on principles rather than price (“principle, not principal!”).

It is impossible for anyone else to measure your utility, or for you to try to compare your total utility to that of other consumers, because it is based on personal likes and dislikes that vary greatly from individual to the next.  What you can do is decide for yourself which goods and prices give you the greatest utility, and then buy accordingly.  That may include political and religious issues in addition to pure dollars and cents.  For example, some conservatives boycott companies that fund [[abortion]], regardless of how inexpensively those companies sell their goods.  Such a boycott maximizes the participants’ utility, but not necessarily their savings.  Many other boycotts have occurred in American history based on principles rather than price (“principle, not principal!”).

== Lack of Utility ==

== Lack of Utility ==