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## Microeconomics

### Course: Microeconomics>Unit 5

Lesson 1: Introduction to consumer theory: total utility and marginal utility

# Deriving demand curve from tweaking marginal utility per dollar

Where does a buyer's demand curve come from? A rational buyer wants to get as much "bang per buck" from their consumption as possible. In economics, that's called marginal utility per dollar spent. When the price of a good decreases, the "bang per buck" on that good increases, which incentivizes consuming more of it. In this video, we derive the individual's demand curve for a good by tweaking the marginal utility per dollar spent. Created by Sal Khan.

## Want to join the conversation?

• At min, when you explain that it makes sense for you too put your first \$1 into buying half a pound of fruit at marginal utility/per \$ of 60. But since you are only getting half, wouldn't your marginal utility be 30? (because you are only getting half and not the full amount) • Why is it 'per dollar'? Why can't it be per half a dollar? Or per two dollars?
(1 vote) • At , why is it that the dollar goes to chocolate bars? It seems like it could just as easily go towards paying for fruit, and you would end up with only half of a chocolate bar being demanded, skewing the demand curve. I can't quite make sense of this. • Either way works, since the utility for the first \$1 (half-bar) of chocolate is 50 and the marginal utility for the 3rd \$1 (1/2 lb) of fruit is also 50. If we purchased the 3rd 1/2 lb of fruit, the marginal utility for the fourth dollar would, again, be 50 while the utility for the first half-bar of chocolate would still be 50. Again, it wouldn't matter. If you spent dollars 3 and 4 on fruit however, you would want to spend dollar 5 on chocolate since the utility for a half-pound of chocolate would still be 50 while the marginal utility for yet another half-pound of fruit will have declined to 25. Therefore, dollars 3 4 5 can be spent on choc choc fruit, fruit fruit choc, fruit choc fruit or choc fruit choc - all will give you a total utility (from dollars 3 to 5) of 150.
• The entire video is based on the assumption that only 5\$ is spent and we get the specific Demand curve.

But if we change the disposable income to 7\$ then the demand graph changes. This cant be the income effect as the graph does not move parallel upwards. Need some explanation on this ! • Where are the half lbs coming from? We were working full lbs then all of a sudden half? • Am I correct in assuming that you could also deduce how the the change in price of the chocolate bar shifted the demand of the fruit (to the right I think) being that you would now buy more fruit at \$2 and figure out the new demand schedule for that as well? • When you spent the 5th dollar, why did you take the MU as 50 ? Isn't it supposed to be 60 ? • I don't understand this example. Why were the quantities broken down by fraction? How am I supposed to think about an additional half a unit as having the same utility as a whole unit if an additional half unit of fruit yields less utility than an additional half unit of chocolate? • at Sal says that for my second dollar I can buy 0.5lbs of fruit but It would not be that I can buy 1 lbs since I have 2 dollars and each one costs 2 dollars? • 2 Questions:
1. In determining the demand curve for chocolate, Sal says ceteris paribus, or holding all else equal, including the price of fruit. In fact, hasn't he changed the price of fruit from \$1 per pound to \$2 per pound?

2. Although Sal says he is determining the demand curve for chocolate, isn't this really just the demand curve for chocolate relative to fruit (and given specific prices of fruit)? Is demand independent of other products/services or is it always relative to some other product/service?
(1 vote) • For your first question, he is saying all else equal. That is, he is keeping everything the same except the price, which he is changing. This is the same as control in a scientific experiment. Whenever you do an experiment, you have to hold all variables the same except the one that you are testing.

For your second question, demand is always relative to some other product. In most cases, you will see demand relative to dollars, but in this case it is fruit.