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## Cost-benefit analysis

Current time:0:00Total duration:6:05

# Introduction to utility

AP Micro: CBA‑1 (EU), CBA‑1.A (LO), CBA‑1.A.2 (EK), CBA‑1.B (LO), CBA‑1.B.2 (EK)

## Video transcript

- [Instructor] We are now going to introduce ourselves to the idea of Utility in Economics. Now in everyday language, if someone says what's
the Utility of that? They're usually saying
what's the usefulness of doing that. And Utility in Economics takes that view of Utility and extends that a little bit. You could view Utility in Economics as a measure of usefulness, usefulness, worth, value. Some economists will even say it's a measure of happiness 'cause things that might
not have a practical use can still have Utility
to them in Economics because they're giving
you some satisfaction or some happiness, or I'll even write that over here. And as we'll see, it is
something that economists try to measure or try to quantify, and they do it with just Utility units. So let's see a tangible example of that. So let's say you wanted to think about your Utility from scoops of ice cream. So if we say, let's make a col, let's make a table here. So number of scoops, that'll be in my left column, and then on my right column, let's think about Total Utility, and I will do it in utils. You could view that as
your unit of Utility. And let me put my columns in here. So, there we go. And so let's say if I have zero scoops of ice cream, well you might guess what my Utility is going to be, it is going to be zero. Now what if I have one scoop of ice cream? Well let's just say that that is 80 Utility units. And I know what you're thinking, Sal, where did you come
with 80 Utility units? And this is really just
an arbitrary number that I'm throwing down here. What's more important is what this is relative to my Utility for other things. So, for example, using this scale, if I said two scoops of ice cream, my Total Utility is 140. 80 and 140 aren't what matter. What matters is the ratio between the two. So if I said my Utility for one scoop of ice cream was 800, then, if this ratio is true, then for two scoops of ice cream, my Total Utility would be 1,400. It could be eight million and 14 million. What matters is the relative Utility. I just happened to anchor on one scoop gives me eight units, Total Utility units. But let's keep going. If we go with this scale, then three scoops of ice cream, let's say that this gives me 180 units of Utility. And I know what you're saying. Even if you get the ratio right, how do you even know that this is the right ratio? Well, economists will
debate how to measure this, but there might be ways
that you could measure it maybe with dollars, with what people are willing to pay, and then you can get the ratios. You could survey people. You could say on a scale of 10, one to 10, how happy will it make you if you got one scoop of ice cream? What if you got two scoops of ice cream? What if you got three? And then you would wanna
get these ratios right. But, of course, it isn't an exact science, but people are trying to quantity this. Now let's just go to four. Four scoops of ice cream would give you a Total Utility, let's say we knew it would give you a Total Utility of 170. Now something interesting is happening. As you got more scoops of ice cream, from zero to one, from one to two, from two to three, it looks like you're getting more Utility, but then all of a sudden, when you have four scoops of ice cream, your Total Utility goes down a little bit. Maybe it's because people can't eat four scoops of ice cream and they say what do I do with that? And they just have all, they're left with a bowl
of melted ice cream. And so it doesn't give
them as much Utility, it makes them feel bad somehow as having three bowls of ice cream or three scoops of ice cream. Another thing to think about is how much does the Total Utility increase every time you get an incremental unit of that thing? And we'll talk about it in more depth in future videos, but that general idea of how much more Utility you get for that incremental unit. In Economics when we're talking about what happens on the increment, we use the word marginal a lot. Marginal Utility, sometimes abbreviated mu. And this would still be in Utility units. And so we could start with that first going from zero to one. I'll start with that
first scoop of ice cream. What's the marginal utility? Well it gave you an incremental 80 units of Utility, so the marginal utility is 80. Now what about that
second scoop of ice cream? Well we know when you had one, you had 80 Total Utility units, and now when you have two, you have 140, so that incremental second scoop gave you to go from 80 to 140, it gave you 60 extra units of Utility. So notice, you are really, it really increased your happiness or, you got a lot of value
out of that first scoop and you still got value outta that second scoop, but it's a little bit less because you're not maybe
just as not as hungry, you're getting a little bit tired of the ice cream. And then that continues to happen on that third scoop,
to go from 140 to 180, that third scoop gave
you 40 units of Utility. And then as we talked about, when you add on that fourth scoop, it didn't even add to your Total Utility, it took away from your Total Utility. So it actually had a
negative marginal utility. It is negative 10. That fourth scoop actually took away from your happiness. So I will leave you there. You have this idea of
Utility, Total Utility, and we also looked at Marginal Utility. And you see in this example, and this is typical, that Marginal Utility typically decreases as you get more and more units of that thing. And in future videos, we're going to use this
framework of Utility, Total Utility, Marginal Utility, to think about how folks might make rational decisions to optimize their Total Utility.