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Basic Microeconomics Reviewer

This document provides an overview of consumer theory and behavior from a microeconomics course. It discusses key concepts such as: 1. Total utility and marginal utility curves, and how marginal utility decreases with additional consumption due to the law of diminishing marginal utility. 2. The water-diamond paradox which explains why consumers are willing to pay more for diamonds despite water having greater total utility. 3. The principle of consumer equilibrium known as equi-marginal principle, which states that a consumer maximizes utility when the marginal utility per dollar is equal across all goods, and total expenditure equals income. 4. An example calculation demonstrates finding the least-cost product combination that satisfies the equi-marginal

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Matthew Pangan
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60 views3 pages

Basic Microeconomics Reviewer

This document provides an overview of consumer theory and behavior from a microeconomics course. It discusses key concepts such as: 1. Total utility and marginal utility curves, and how marginal utility decreases with additional consumption due to the law of diminishing marginal utility. 2. The water-diamond paradox which explains why consumers are willing to pay more for diamonds despite water having greater total utility. 3. The principle of consumer equilibrium known as equi-marginal principle, which states that a consumer maximizes utility when the marginal utility per dollar is equal across all goods, and total expenditure equals income. 4. An example calculation demonstrates finding the least-cost product combination that satisfies the equi-marginal

Uploaded by

Matthew Pangan
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© © All Rights Reserved
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Basic Microeconomics

2nd term – Finals


A.Y 2022-2023

Unit 3 – Theory of Consumer Behavior


1. Utility Approach or Cardinal Approach
a. Total and Marginal Utility Curves
- Utility or satisfaction derived from a good or services is measurable and is rated & the unit of
measurement is called UTIL.
 Total Utility (TU)
- the total satisfaction derived by the consumer for consuming specific units of goods
- The TU increases as more units of goods are consumed until a certain point, the
maximum point - known as the saturation point, after which the TU decreases
 Marginal Utility (MU)
- the satisfaction derived from consuming an additional unit of the good
- The MU decreases as an additional unit of the good is consumed
- At the saturation point, MU is assumed to be zero after which MU becomes negative
because of storage or disposal problems

b. Law of Diminishing Marginal Utility


Utility Schedule
Utility (Q) Total Utility (TU) Marginal Utility (MU)
0 0 ----
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
Marginal Utility = change in TU / change in Q
Change in TU = TU2 – TU1
Change in Q = Q2 – Q1

- the values of the MU decreases as an additional unit of the good is consumed, the falling MU
illustrates the Law of Diminishing Marginal Utility
- In Filipino, this is called ”nagsasawa or nauumay” which is a very normal behavior of a
consumer.
c. Water-Diamond Paradox
- Water is essential to human life, the Total Utility received from water is greater than that of the Total
Utility from diamonds.
- the price that people are willing to pay is NOT based on the Total Utility of the good BUT depends on the
Marginal Utility
- the MU of the additional unit of water consumed is very low, therefore, people are willing to pay only a
very low price for the additional unit of water to be consumed because all the units of water are
identical and exist in abundance.
- people purchase so few diamonds, so the MU of the additional unit of diamond is very high, therefore,
people are willing to pay a high price for the additional diamond they will have due to the good’s rarity
and prestige status.

d. Consumer Equilibrium – Equi-Marginal Principle


- A rational consumer aims to attain total satisfaction from the goods he consumes when he spends his
income
- To attain this goal of consumer equilibrium, the two conditions of the EQUI-MARGINAL PRINCIPLE must
be fulfilled:
 The marginal utilities per peso spent on all goods to be purchased are equal.
Mua / Pa = MUb / Pb = …...
 The purchases are equal to the budget or income to be spent by the consumer.
PaQa + PbQb + …... = Budget or Income
- Suppose that A & B are the only two goods available and the PA = P2.00 and PB = P1.00 and the
consumer’s income is P12.00 per time and is all spent. What is the Least-cost product combination
(LCPC) that yields consumer equilibrium? What is the total utility derived from the consumer’s
equilibrium combination?
Qa TUa Mua Mua/Pa Qb Tub MUb MUb/Pb
0 0 ---- ---- 0 0 ---- ----
1 16 16 8 1 11 11 11
2 30 14 7 2 21 10 10
3 42 12 6 3 30 9 9
4 52 10 5 4 38 8 8
5 60 8 4 5 45 7 7
6 66 6 3 6 51 6 6
7 70 4 2 7 56 5 5
8 72 2 1 8 60 4 4

The Least-Cost Product Combination is 3 Qa & 6 Qb


1. The marginal utilities per peso spent on Good A is equal to than of Good B.
(Compared the 4th & 8th columns)
2. The purchases equal the income spent. 2*3 + 1*6 = 12 6 + 6 = 12
What about other combinations with equal marginal utilities per peso spent?
– these are not equilibrium because the purchases do not equal the income.
2*1 + 1*4 ≠ 12
2*2 + 1*5 ≠ 12
2*4 + 1*7 ≠ 12
2*5 + 1*8 ≠ 12
3. TUA + TUB = TU of the 2 goods 4
2 + 51 = 93 utils

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