Microeconomics for Beginners - Week 2_Video 1_Utility

Summary

This microeconomics class introduces the concept of utility, which refers to the satisfaction a consumer gains from consuming goods or services. The lesson covers two types of utility: cardinal utility, which quantifies satisfaction in 'utils,' and ordinal utility, which ranks preferences without numerical values. Key concepts like total utility, average utility, and marginal utility are also explained, emphasizing how satisfaction changes with consumption. The class offers real-world examples and encourages students to engage by quantifying their favorite foods' utility.

Takeaways

• 😀 Utility refers to the satisfaction or happiness a consumer derives from consuming a product or commodity.
• 😀 There are two main types of utility: Cardinal utility (measurable in numerical terms) and Ordinal utility (based on ranking preferences).
• 😀 Cardinal utility can be quantified in 'utils' and is measurable, meaning satisfaction can be assigned a numerical value.
• 😀 Example of Cardinal utility: Consuming multiple products like chocolates and pastries, where their satisfaction can be added together (e.g., 20 + 20 + 40 utils).
• 😀 Ordinal utility focuses on ranking preferences rather than measuring satisfaction with numbers. For example, you rank foods based on preference.
• 😀 Total utility (TU) is the total satisfaction derived from consuming a product or commodity.
• 😀 Average utility (AU) is the satisfaction derived from consuming a single unit of a product, calculated by dividing total utility by the number of units.
• 😀 Marginal utility (MU) refers to the additional satisfaction derived from consuming one more unit of the same product.
• 😀 The law of diminishing marginal utility suggests that as we consume more of a good, the additional satisfaction (marginal utility) tends to decrease.
• 😀 Reflecting on personal preferences and attempting to quantify satisfaction can sometimes be challenging due to varying circumstances and subjective feelings.

Q & A

What is the definition of utility in economics?

In economics, utility refers to the satisfaction or happiness a consumer derives from consuming a product or service.

What is the difference between cardinal and ordinal utility?

Cardinal utility is measurable and quantifiable in numerical terms, while ordinal utility involves ranking preferences without assigning specific numbers.

Can you give an example of cardinal utility?

If you consume two chocolates, the satisfaction or utility derived could be quantified as 20 units for the first and 40 units for the second, resulting in a total of 60 units.

What is the law of diminishing marginal utility?

The law of diminishing marginal utility states that as more units of a product are consumed, the additional satisfaction derived from each successive unit decreases.

Why is it sometimes difficult to quantify utility?

It is difficult to quantify utility because satisfaction can vary depending on individual preferences, circumstances, and experiences, making it subjective and not easily measurable.

What is ordinal utility and how is it used in everyday life?

Ordinal utility is the concept where preferences are ranked instead of being measured numerically. For example, when choosing between foods, you may rank dosa first, poha second, and upma third.

What is total utility?

Total utility is the total satisfaction or benefit a consumer derives from consuming all units of a product or service.

What is average utility?

Average utility is the total satisfaction derived from consuming a product divided by the number of units consumed.

How is marginal utility calculated?

Marginal utility is calculated as the change in total utility divided by the change in quantity consumed. It measures the additional satisfaction from consuming one more unit of a good or service.

Why is the concept of marginal utility important in microeconomics?

Marginal utility is important in microeconomics because it helps to understand consumer behavior, particularly how consumers make choices when allocating limited resources among various goods.