Marginal utility and budget lines
Marginal Utility Marginal utility and marginal benefit. How you would spend $5 on chocolate and fruit
⇐ Use this menu to view and help create subtitles for this video in many different languages.
You'll probably want to hide YouTube's captions if using these subtitles.
- What I wanna do in this video is think about a concept
- that we've already thought about multiple times
- in the context of many many videos
- and this is the idea of utility
- which is really just a way of saying
- how much benefit, or satisfaction, or value
- do you get out getting a good or service
- but the angle that we're gonna take in this video
- is gonna be slightly different
- in the past when we were measuring benefit or value
- we either measured in term of dollars
- or we said hey
- the benefit of getting an incremental Honda Civic
- was 5,000 dollars
- and when we're talking about incremental
- we're talking about the marginal benefit
- or early on, when we talked about
- the production possibilities frontier
- and when we talked about the marginal benefit
- of getting another squirel
- we were talking about it in terms of berries
- we were talking in terms of another good or service
- but what we're gonna do in this video
- is just think about it in absolute terms
- we're just gonna think of some arbitrary way
- of measuring utility
- and then just assign values to
- what's the value of getting one chocolate bar
- and then what's the value that we give
- to the next chocolate bar and chocolate bar after that
- we're gonna do the same things about fruit
- and from that we're gonna see
- if we can kind of built up some the things
- that we already know about demand curves
- and how things relate to price
- and the price of other goods and things like that
- and in particular we're gonna focus on marginal utility
- so obviously you could have total utility
- if I have four chocolate bars you could say that
- the total utility I am getting from all four of them
- or you can think of the marginal utility
- the utility I am getting
- from the next incremental chocolate bar
- or the next incremental pound of food
- and before I move on there's one thing
- this was a point of confusion for me
- when I first learned this
- ok I am using the word marginal utility now
- -in the past I've used the word marginal benefit-
- they sound very similar
- in fact I even used the word benefit
- when I defined marginal utility
- How are these things different?
- And the simple answer is
- conceptually they aren't
- conceptually they are the exact same thing
- though the difference is
- how the words tend to be used
- in the context of traditional microeconomics class
- so when people talk about utility
- they tend to measure
- in terms of some type of absolute measure
- that they just came up with
- some type of you could view it as utility units
- some type of satisfaction units
- while when they talk about marginal benefit
- they tend to measure it
- either in dollars or in terms of some other goods
- but I've seen either term used either way
- so they really do mean the exact same thing
- but in this video we're gonna use the term utility
- and we're gonna come up with measuring scale
- and it's somewhat arbitrary one
- and we're gonna use that
- to come up with some conclusions
- about the basket of goods someone might purchase
- depending on different prices
- so as you can imagine, I prewrote these two things
- we're gonna talk about chocolate bars
- and we're gonna talk about fruit
- so right here in these little tables here
- I've shown the marginal utility of each incremental bar
- and in case of fruit of each incremental pound of fruit
- so this is saying that first chocolate bar
- obviously if I have no chocolate bars
- I am getting no utility from chocolate bars
- and this is saying that the first chocolate bar
- has a marginal utility
- so the utility of that next icnremental one is a hundred
- I'm not saying a hundred dollars
- I'm not saying
- it's equivalent to a hundred pounds of fruit
- I'm not saying it's equivalent to a hundred berries
- I'm just saying arbitrarily saying it is a hundred
- and what matters is not that
- this is a hundred or thousand or million
- what matters is how this compares to others things
- so for example
- if I would say that this is a hundred
- and if I know that I like fruit
- a pound of fruit 20 percent more than that first
- or if I like an incremental
- -my first pound of fruit-
- 20 percent more
- then I would have to say that the marginal utility
- of my first pound of fruit is 120
- and this is what we said right over here
- and if another way to think about it is
- if the marginal utility of the second chocolate bar I get
- because I've already enjoyed a little bit of chocolate bar
- and I am a little "chocolated" out
- is 20 percent less than that
- then if this is a hundred that this would have to be 80
- I could have said this to be 1000
- and this to be 800
- and this to be 1200
- I could have said this to be 10
- and this to be 8
- and this to be 12
- what matters is that
- they really just have the same ratios between them
- that really do reflect much actual preferences
- so let's just think about this a little bit
- my first chocolate bar I am pretty excited
- I just call it a hundred
- the next chocolate bar
- I am a little bit less excited about it
- I've already had some chocolate
- my craving has been satiated to some degree
- but I still like chocolate so I'll call that an 80
- we can call it 80 satisfaction units
- whatever you wanna call it
- then the next chocolate bar after this
- now I am starting to get pretty stuffed
- and I am really "chocolated" out
- and so I am not getting as much benefit from it
- and then finally if you give me another chocolate bar
- it's even less
- and if we were to list fifth chocolate bar
- I might not want it at all
- my marginal utility might go to zero
- for that fifth chocolate bar
- maybe for that sixth chocolate bar
- I have to somehow get rid of it
- I am so tired of chocolate bars
- maybe I have a negative marginal utility
- and we can think about the same thing with fruit
- the first pound of fruit
- I am pretty excited about fruit
- I have a fruit craving
- I like that first pound of fruit
- even more than that first chocolate bar
- I like it 20 percent more
- so I get 120, you could call it utility points
- or whatever arbitrary you want to call it
- then my next pound of fruit
- once again, I am having diminishing utility
- diminishing benefit
- as I get more and more incremental pound of fruit
- now, it's very important to realize
- this is marginal utility
- not total utility
- this is the utility I am getting from each incremental pound
- it's positive
- so I am still enjoying that next incremental pound
- I am just enjoying it little bit less than the pound before
- and to realize what total utility is
- if I were to have to pounds of fruit
- I would get 120 of utility from that first pound
- and I would get a 100 from that second pound
- and so you would say I had a total utility of 220 utility units
- from both pounds
- now with just the information that I've given here
- there are few things you could say
- you could say well look
- my first pound of fruit I enjoy more
- 20 percent more
- than my first chocolate bar
- you could also say my second pound of fruit
- I derive about the same amount of value
- as my first chocolate bar
- you could say that my second chocolate bar
- I enjoy less than my first chocolate bar
- you could even say 20 percent less
- if these numbers are good
- but it still doesn't give you a lot of information
- about how you would actually spend your money
- you might say
- obviously wouldn't you just want to buy fruit
- over chocolate bars
- or at least that first pound of fruit
- over that first chocolate bar?
- well you might
- but it depends on how much fruit actually cost
- just looking at this alone
- we can just make relative judgements
- about how much we prefer each incremental bar
- or each incremental pound
- or them relative to each other
- but it really doesn't tell us
- how we would spend our actual money
- so let's think about things
- let's put some prices on some of these goods
- and think about we would actually allocate our dollars
- given these marginal utility numbers right over here
- so let's say that the chocolate bars are 1 dollar per bar
- and let's say that the fruit is 2 dollars per pound
- 2 dollars per pound
- so this is going to be per pound
- and this is going to be per bar
- and what we're gonna think about is
- we're gonna think about marginal utility
- for that incremental chocolate bar per price
- of that incremental chocolate bar
- here the price is gonna be at a dollar per pound
- so here for that first bar
- I am going to be spending a dollar
- and I am getting a hundred marginal utility points
- whatever you want to call it
- so I am getting a 100 marginal utility points
- for that dollar
- so I'm getting a hundred
- a hundred marginal utility points per dollar
- Here, same logic
- I am getting 80 marginal utility points per dollar
- this is pretty simple math
- here I am getting 60 marginal utility points for the dollar
- her I am getting 40
- so that doesn't seem too interesting
- it might be a little bit more interesting here
- what is the marginal utility per incremental fruit
- that I am getting per dollar
- per price
- or I should say per price of the incremental fruit here
- well here, the first pound of fruit
- I am getting 120 marginal utility points
- but I paid 2 dollars for it
- so 120, let me write it over here
- so for that first incremental fruit
- the marginal utility for that first fruit is 120
- and the price for that first pound of fruit is equal to 2
- so I am getting 60 marginal utility points per dollar
- I'm getting 60
- here 100 marginal utility points
- but I am spending 2 dollars
- so it's 50 points per dollar
- this is 25 points per dollar
- this is 10 points per dollar
- now this makes things a little bit more interesting
- if I had 5 dollars to spend
- how would I want to spend my 5 dollars
- well where am I getting the most
- you really want to just think about
- where you're getting the most satisfaction for each dollar
- where you're getting the most bang for your buck
- so where am I going to spend my first dollar
- so dollar one:
- let's think about it a little bit
- my first dollar
- so dollar one:
- my first dollar
- where am I going to get the most satisfaction per dollar
- well I get the most satisfaction per dollar right over here
- I get a 100 satisfaction units per dollar
- even though I like a pound of fruit more
- I am getting less satisfaction per dollar
- so I am getting less bang for my buck
- so my first dollar is going to go right over there
- I am going to buy one candy bar
- then where am I going to spend my second dollar
- dollar two:
- so once again, I just wan to look at all my options
- and we're gonna assume that
- I am going to spend my dollar on either of these two
- just to limit our universe
- once again I am gonna maximize my bang for buck
- I get 80 satisfaction points
- or marginal utility points over here per dollar
- and I only get 60 over here
- so I am gonna buy a second chocolate bar
- let's keep going
- where am I gonna spend my third dollar
- now it gets a little bit interesting
- I could spend my third dollar right over here
- and get 60 points per dollar
- or I could spend it over here
- and get 60 points per dollar
- I would actually get the same amount
- these are both 60 points per dollar
- so I am kind of neutral
- I am getting the same bang for my buck
- whether I get another chocolate bar
- or whether I get another fruit
- so just for simplicity
- let's say I get another chocolate bar
- I could have got the fruit too
- so it's really a toss-up
- I could flip a coin
- and I choose to get another chocolate bar
- so I spent my first three dollar on three chocolate bars
- now, where am I going to spend my fourth dollar
- well my fourth dollar
- now my best bang for my buck
- isn't to get another chocolate bar
- I am only going to get 40 points per buck there
- now it is to spend it on fruit
- so now the next dollar I could spend on half a pound of fruit
- and I would get this
- so my fourth dollar, I could spend on this
- for half a pound of fruit
- because it's two dollars per pound
- and then I could spend my fifth dollar there too
- so this is my fourth and my fifth dollar
- because it's two dollars
- you could think of it we're spending
- 2 dollars for one pound of fruit
- and we're getting 60 utility points per dollar
- so we're getting the best bang for our buck right over there
- but what was useful about this is that it allowed us
- without thinking money
- just say how much do we like these things
- irrespective of their actual price
- and then given a certain price
- it allowed us to think rationally
- about how would we actually spend our money
- in this case when chocolate bars are a dollar
- and fruit is two dollars per pound
- we decided to buy three chocolate bars
- and only one pound of fruit
Be specific, and indicate a time in the video:
At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
|
Have something that's not a question about this content? |
This discussion area is not meant for answering homework questions.
Discuss the site
For general discussions about Khan Academy, visit our Reddit discussion page.
Flag inappropriate posts
Here are posts to avoid making. If you do encounter them, flag them for attention from our Guardians.
abuse
- disrespectful or offensive
- an advertisement
not helpful
- low quality
- not about the video topic
- soliciting votes or seeking badges
- a homework question
- a duplicate answer
- repeatedly making the same post
wrong category
- a tip or feedback in Questions
- a question in Tips & Feedback
- an answer that should be its own question
about the site
Share a tip
Suggest a fix
Have something that's not a tip or feedback about this content?
This discussion area is not meant for answering homework questions.