Utility

- the ability of something to satisfy needs or

wants

Utility denotes satisfaction, a subjective
pleasure that an individual can derive from
consuming a good or service.
In economics, it explains how individuals
divide their limited resources among the
commodities that provide them satisfaction.
The consumer prefers
the best bundle of goods
that he can afford
Tastes, preferences and income are the
factors that make an individual decide
what bundle of goods to consume.

Tastes and preferences define what you
like about the good, and the utility or
satisfaction you receive when consuming
various goods.

Example:
Price of pandesal = 1 peso per piece
You would buy 70 pieces per week.
If price of pandesal = .50 centavos per piece
You would buy more.

Can We Measure Satisfaction or Utility?
Ordinal utility theory states that while
the utility of a particular good or service cannot
be measured using a numerical scale, pairs of
alternative bundles of goods can be ordered
such that one is considered by an individual to
be worse than, equal to, or better than the
other.
This contrasts with cardinal utility theory,
which generally treats utility as something whose
numerical value is meaningful in its own right.
Tastes and preferences are subjective in
nature.
Basically, your tastes and preferences will
tell something about your personality.
Your preferences depict which goods
provide satisfaction and how much
satisfaction you will receive.
- This law states that as an individual
consumes more units of commodity per unit
of time, his/her total utility increases, reaches
its maximum, and starts to decrease.
Example: Pork Lechon is one of your favorite Filipino
food. Your breakfast of pork lechon gives you a
magnificent meal. Your lunch of the same meal doesnt
give the same tasty experience, meaning the extra
satisfaction or your marginal utility is already
diminishing. Your dinner with pork lechon gives you less
and less utility.
Pork Lechon
(Qx)
Total Utility
(TU)
Marginal Utility
(MU)
0 0
17.5
1 17.5
13.5
2 31
10.5
3 41.5
8.5
4 50
4
5 54
0
6 54
Example: Suppose a person eats Bread and 1st unit
of bread gives him maximum satisfaction. When he
will eat 2nd bread his total satisfaction would
increase. But the utility added by 2nd bread(MU) is
less than the 1st bread.
Slices of Bread
(Qx)
Total Utility
(TU)
Marginal Utility
(MU)
0 0 -
1 70 70
2 110 40
3 130 20
4 140 10
5 145 5
6 140 -5
Consumer Equilibrium
- a situation in which a person gets maximum
satisfaction and has no tendency to change his
pattern of consumption
Utility
- a Want satisfying power of any commodity is
known as consumer equilibrium
Total Utility
- It is the sum total of utility derived from the
consumption of all units of a commodity
Marginal Utility
- refers to additional utility on account of the
consumption of an unit of a commodity
Budget line
- It refers to attainable combinations of sets of two
commodity at given prices of commodity and
income of the consumer
Utils
- fictional units
- which serve to quantify the consumer's additional
utility or satisfaction from consuming different
quantities

- the meeting point of consumers needs and resource.

Example: FRUITS (X) = $2
VEGETABLE (Y) = $1

INCOME = $5

Quantity
Marginal
Utility (MU)

1 24 12
2 18 9
3 12 6
4 6 3
FRUITS (X)
Quantity
Marginal
Utility (MU)

1 9 9
2 8 8
3 5 5
4 1 1
VEGETABLES (Y)

18
$2
=
9
$1

9 = 9

) +

) = INCOME

$2(2) + $1(1) = 5
4 + 1 = 5
SOLUTION:
3 Assumptions of rational References:

Completeness A property of preference that implies a
bundle of goods can be ranked as Preferred, Indifferent,
or less preferred to one another.

Nonsatiation - Known as the More is Better property
of preferences.

Transitivity If bundle A is preferred over bundle B, and
bundle B is preferred over bundle C, then Bundle A is
preferred over bundle C.
- A curve that show combination of
goods which gives that same level of
satisfaction to the consumers so that an
individual is indifferent.


An Indifference Schedule
Characteristics of Indifference Curve
Negatively Sloped
Convex to origin
Do not intersect
Negatively sloped
Negatively sloped can be defined
through marginal rate of substitution
(MRS). Marginal rate of substitution is the
amount of units of good x have to be
given up in order to gain an extra unit of
good y, while keeping the same level
of utility.
Convex to Origin
An indifference curve is convex to the
origin because of the diminishing MRS, which
means an individual is willing to give up less
of Y to gain additional units of X. Or less of
the remaining good Y makes it more
valuable than the additional unit of good X.
Do not intersect
- The show the different
combinations of x and y that the consumer
can purchase given his income and the
prices of the goods.

- A describes the limits to
consumption choices and depends on a
consumers budget and the prices of goods
and services.
Budget Line
Movement of
Budget Line
Initial Budget
Line
Indifference Curve
- is a graph showing different bundles of goods
between which a consumer is indifferent that is,
at each point on the curve, one can
equivalently refer to each point on the
difference curve as rendering the same level of
utility (satisfaction) for the consumer. Utility is
then a device to represent preferences rather
than something from which preferences come.
- A consumer is in equilibrium when, given
his income and the price of goods, the
consumer maximizes the total utility. Or a
consumer is in equilibrium when the
tangency of the budget line and the
indifference curve is achieved.
Income Consumption
- Is a collection of points of consumer
equilibrium resulting from varying
income.
Shape of Income-Consumption Curve
Upward-sloping if good X is normal
If consumer income rises, consumes more of good X
Downward-sloping if good X is inferior
If consumer income rises, consumes less of good X






Engel curve
- shows the amount of a commodity
that the consumer would buy per
unit of time at different level of
income

Price Consumption Curve
- Is a collection of points of consumers
equilibrium resulting from varying the
price of good Y.
Income effect
- An increase in price reduces a consumers buying
power, effectively reducing the consumers income and
causing the consumer to buy less of at least some goods.

Income effect describes the effects of changes in prices
on consumption. According to the income effect, an
increase in price causes a buyer to demand the lower
quantity of the commodity and vice versa. Although the
buyer's actual income hasn't changed, the change in
price makes the buyer feel as it has because his real
income has decreased.
Example:






Definition of Substitution effect: If utility held
constant, as the price of the good increases,
consumers substitute other, now relatively
cheaper goods for that one.
The Substitution Effect
Good luck sa Quiz

MICROECONOMICS | MWF 5-6 Professor Januel Hebrado

GROUP 1

Adolfo, Camille Eusebio, Danica Sesbreo, Justine
Albis, Katrina Ignacio, Karl Pascua, Nikki
Bandong, Paula Manansala, Jerard Olin, Queenie
Delos Reyes, Rovinson Mateo, Zhalyn Quiosa, Ella
Guevarra, Joymee Moreno, Raymundo Vito, Amynah