Unit 2 Utility & Elasticity (Micro)

Unit 2 Overview: Top 10 things you need to know about diminishing marginal utility, consumer behavior, price elasticity of demand, and price elasticity of supply. This is geared toward college-level principles of micro courses and students enrolled in AP Economics. Take notes and pause when necessary.

Top 10 concepts in this video:

#1. Total Utility vs. Marginal Utility

#2. Utility-Maximization Formula

#3. Consumer & Producer Surplus

#4. Determinants of Price Elasticity of Demand

#5. Slope vs. Elasticity

#6. Extreme Elasticity

#7. Total Revenue & Elasticity

#8. Income Elasticity of Demand

#9. Cross-Price Elasticity of Demand

#10. Price Elasticity of Supply

What is the law of diminishing marginal utility?

The law of diminishing marginal utility states that as you consume an additional unit of a good, your added happiness or benefit from consuming that one added unit falls. For example, you just ate your fourth taco and realize that the third taco gave you more additional satisfaction than the fourth. That's because of diminishing marginal utility. Say you just completed your seventh year of marriage, and realize that your additional happiness gained in the seventh year is less than the additional happiness gained in the sixth year. That's because of diminishing marginal utility.

Your total utility or total happiness increases as you consume more units of a product, however, the rate that your total utility increases will fall at some point. That is diminishing marginal utility.

Value lies at the margin: Water will give you more total satisfaction throughout your life than the diamonds that you own. However, the marginal utility of the last diamond you purchased is much greater than the last glass of water you drank. That idea along with the concept of scarcity explains why diamonds are so expensive and water is so cheap.

How do you calculate the utility-maximizing combination of goods for a consumer?

When a buyer purchases two types of goods, we can determine the utility-maximizing quantities of each good using the following equation:

Marginal Utility of X / Price of X = Marginal Utility of Y / Price of Y

The ratios must equal one another. If you need the MU / P to decrease, then buy more units of that good. This is because of the law of diminishing marginal utility (as you buy additional units, marginal utility decreases).

If you need the MU / P to increase, then buy less of the good.

NB7. Consumer Surplus (Micro)

Learning objectives:

1. Students will be able to define consumer surplus.

2. Students will be able to identify the area of consumer surplus in a market.

3. Students will be able to calculate the area of consumer surplus in a market.

NB7. Producer Surplus (Micro)

Learning objectives:

1. Students will be able to define producer surplus.

2. Students will be able to identify the area of producer surplus in a market.

3. Students will be able to calculate the area of producer surplus in a market.

NB7. Elasticity Types (Micro)

NB7. Budget Line / Budget Constraint (Micro)

What is a budget constraint graph?

In the video lesson above, an individual is deciding how many swimsuits and pairs of flip flops to purchase before beach season. A budget line is comprised of the different combinations of the two goods that the consumer can afford. The consumer can afford any combination on the line and inside the line, but cannot afford any combination outside the line. 

The main ideas behind an individual's budget line is similar to a constant-cost production possibilities frontier. A budget line looks at the different combinations of goods that an individual can afford while a production possibilities frontier looks at the different combinations of goods that an economy can produce. This is an excellent illustraion of opportunity cost.