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  • What I want to 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-- utility, which

  • is really just a way of saying how much benefit

  • or satisfaction or value do you get out

  • of getting a good or service.

  • But the angle that we're going to take in this video

  • is going to be slightly different.

  • In the past, when we were measuring benefit or value,

  • we either measured in terms of dollars,

  • where we said, hey, the benefit of getting an incremental Honda

  • Civic was $5,000.

  • And we talk about the incremental--

  • we're talking about, and we've heard the word many times--

  • we were talking about the marginal benefit.

  • Or early on, when we talked about the production

  • possibilities frontier and we talked

  • about the marginal benefit of another squirrel,

  • we were talking about it in terms of berries.

  • We were talking about it in terms

  • of another good or service.

  • What we're going to do in this video

  • is just think about it in absolute terms.

  • We're just going to 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 then the chocolate bar after that?

  • And we're going to do the same things about fruit.

  • And from that, we're going to see

  • if we can build up some of 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 going to focus on marginal utility.

  • So obviously, you could have total utility.

  • If I have four chocolate bars, you

  • could say the total utility I'm getting from all four of them.

  • Or, you could think about marginal utility,

  • the utility I'm getting from the next incremental chocolate

  • bar or the next incremental pound of fruit.

  • And before I move on, there's one thing--

  • and this was a point of confusion for me

  • when I first learned this-- is OK,

  • I'm 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 the word utility.

  • How are these two things different?

  • And the simple answer is, conceptually, they aren't.

  • Conceptually, they are the exact same thing.

  • The difference is how the words tend

  • to be used in the context of a traditional microeconomics

  • class.

  • So when people talk about utility,

  • they tend to measure it in terms of some type

  • of absolute measure that they just came up with.

  • You can view them as utility unit,

  • 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 going to use the term utility,

  • and we're going to come up with a measuring scale,

  • and it's a somewhat arbitrary one.

  • And we're going to use that to come up

  • with some conclusions about the basket of goods someone

  • might purchase depending on different prices.

  • So as you could imagine, I pre-wrote these two things.

  • We're going to talk about chocolate bars,

  • and we are going to talk about fruit.

  • So right here in these little tables here,

  • I've shown the marginal utility of each incremental.

  • In the case of chocolate bars, each incremental bar,

  • and in the case of fruit, each incremental pound of fruit.

  • So this is saying that first chocolate bar-- obviously,

  • if I have no chocolate bars I'm getting

  • no utility from chocolate bars-- and this

  • is saying that that first chocolate

  • bar has a marginal utility.

  • So the utility of that next incremental one is 100.

  • I'm not saying $100.

  • I'm not saying it's equivalent to 100 pounds of fruit.

  • I'm not saying it's equivalent to 100 berries.

  • I'm just arbitrarily saying it is 100.

  • And what matters is not that this

  • is 100 or 1,000 or a million.

  • What matters is how this compares to other things.

  • So for example, if I-- let's say this is 100,

  • and if I know that I like fruit-- a pound of fruit--

  • 20% more than that first-- Or if I like

  • an incremental-- my first pound of fruit-- 20% 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'm a little chocolated

  • out-- is 20% less than that, then if this is 100,

  • then this would have to be 80.

  • I could have set this to be 1,000 and this

  • to be 800 and this to be 1,200.

  • I could have set this to be 10 and this

  • to be 8 and this to be 12.

  • What matters is, is that they really just

  • have the same ratios between them that really do

  • reflect my actual preferences.

  • So let's just think about this a little bit.

  • My first chocolate bar, I'm pretty excited.

  • I just call it 100.

  • The next chocolate bar, I'm 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 could call it 80 satisfaction units,

  • whatever you want to call it.

  • Then the next chocolate bar after this-- now I'm

  • starting to get pretty stuffed, and I'm really chocolated out.

  • And so I'm 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 a fifth chocolate bar,

  • I might not want it at all.

  • My marginal utility might go to 0 maybe

  • for that fifth chocolate bar.

  • Maybe that sixth chocolate bar, I have to somehow get rid of it

  • somehow, because I'm so tired of chocolate bars.

  • Maybe it'll have a negative marginal utility.

  • And we could think about the same thing with fruit.

  • The first pound of fruit, I'm 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% more.

  • So I get to 120, you could call it utility points

  • or whatever arbitrary unit you want to call it.

  • Then my next pound of fruit, once again

  • I'm having diminishing utility, diminishing benefit

  • as I get more and more incremental pounds of fruit.

  • Now, it's very important to realize

  • this is marginal utility, not total utility.

  • This is a utility I'm getting from each incremental pound.

  • It's positive, so I'm still enjoying

  • that next incremental pound.

  • I'm just enjoying it a little bit less than the pound before.

  • And to realize what total utility is,

  • if I were to have two pounds of fruit,

  • I would have 120 of utility from that first pound.

  • And then I would have 100 from the second pound.

  • And so you would say I had a total utility of 220,

  • you could call them utility units, from both pounds.

  • Now with just the information that I've given here,

  • there's a few things you could say.

  • You could say, well look, my first pound of fruit

  • I enjoy more, 20% more than my first chocolate bar.

  • You could also say that my second pound of fruit,

  • I enjoy it or I could 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% less if these numbers are good.

  • But this still doesn't give you a lot

  • of information about how you would actually

  • spend your money.

  • You might say, well, obviously wouldn't you

  • want to just buy fruit over chocolate bars,

  • or at least that first pound of fruit over that first chocolate

  • bar?