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Chapter 3

ECON 212 Chapter Notes - Chapter 3: Toothpaste, Diff Utility, Marginal Utility


Department
Economics
Course Code
ECON 212
Professor
Arthur E Stewart
Chapter
3

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Chapter 3: Consumer Preferences and the Concept of Utility
Representation of Preferences
A basket/bundle is a combination of goods and services that an individual might consume
Consumer preferences are indications of how a consumer would rank any two possible
bundles assuming both are available and at no cost
Assumptions about Consumer Preferences
1. Preferences are complete the consumer can rank any and all bundles and all bundle
combinations are exhausted
2. Transitivity If A>B and B>C, then A>C
3. More is better any basket that gives more of one good (or both goods) is preferred to
any bundle that gives less of one good (or both goods) by comparison
Ordinal and Cardinal Ranking
Ordinal rankings indicate whether a consumer prefers one bundle to another, but does not
contain quantitative info about the intensity of that preference
Cardinal rankings are a quantitative measure of the intensity of a preference for one good
over another
Utility Functions
This is a function that measures the level of satisfaction a consumer receives from any
basket of goods and services
Preferences with a Single Good: The Concept of Marginal Utility
Marginal Utility
This is the rate at which total utility changes as the level of consumption rises
The marginal utility of good x can be calculated as; MUx= 
o This graphically represents the slope of the tangent line at quantity x
The additional satisfaction that is obtained from consuming an additional good depends
on how much of the good has already been consumed
The Principle of Diminishing Marginal Utility
Total Utility and MU cannot be plotted on the same graph
o Y axis on TU measures the total utility gained from each additional y
o Y axis on MU measures the marginal utility from each additional y
Marginal utility is the slope of the (total) utility function for every value of x
The principle of diminishing marginal utility states that after some point, as the
consumption of a good increases, the marginal utility of that good will begin to fall
o Still get more total utility from the additional consumption, but it is not a high as
the one before it
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