What do people – anyone, really -- want out of life?
To be happy.
How do people make themselves happy?
By consuming things -- cars, books, travel, education – that will make them happy.
Take Jim for example.
He really likes cookies.
How much happiness can he get from cookies?
I mean, if there were an unlimited supply of cookies available, and Jim didn't have
to worry about money because the cookies were free, could we make him infinitely happy?
Let’s try this experiment with Jim, but go ahead and feel free to try this at home.
We make cookies, and only cookies -- this is important; if you allow even a drink, it’ll
pollute the experiment -- available to Jim.
As many as he wants.
Free of charge.
After he eats each cookie, have him rate that cookie based on how much it added to his overall
sense of well-being.
You know -- if he was hungry, and loves cookies, he’d probably give it a 10; if he’s already
eaten, or if it’s just a stomach filler, it might be a 4 or a 5; and if it adds nothing
whatsoever to his well-being, it's a 0.
I once tried using oatmeal-raisin cookies for this experiment, and the test case actually
SPAT the cookie out on the table.
Turned out she hated raisins.
Since this cookie actually took away from her sense of well-being, it's appropriate
to give it a negative rating.
OK, let's go back to Jim.
Jim loves cookie #1.
He was hungry, and it really hit the spot.
This first cookie added 10 to his overall sense of well-being.
Jim says that that cookie #2 was really good, but the first cookie already took the edge
off his hunger.
He reports that the second cookie added 8 to his overall sense of well-being.
Cookie #3?
Still good, but Jim’s starting to fill up.
Cookie #3 adds 5 to his sense of well-being.
Cookie #4 -- Jim is getting pretty full.
He eats it to be polite, but he doesn't get a lot of added satisfaction from it.
Cookie #4… is a 2.
You offer Jim cookie #5.
He says he rather not.
You insist.
Jim eats the fifth cookie, and now he looks a little bit green.
He feels worse than before; he rates cookie #5 as a -3.
What we discover from this experiment is that if you give a consumer identical successive
units of any one consumer good, each unit consumed yields less and less happiness, or
satisfaction (economists use the term “utility,” instead of “satisfaction”) than the previous
unit.
This is known as the Law of Diminishing Marginal Utility, where marginal utility is the amount
added to total utility, with the last unit you’ve consumed; or the change in total
utility over the change in quantity.
Here’s what looks like for Jim [pause].
Try this: based on his marginal utility figures, what is Jim’s total utility -- that is,
his overall sense of well-being?
[pause] At what point should Jim have stopped eating cookies; that is, where would he have
maximized his utility, or happiness, as a consumer?
[pause] Consumption should stop when Jim isn't adding any more to his happiness, but isn't
yet losing happiness.
To reach maximum utility, consumption needs to stop where marginal utility is equal to
zero.
For Jim, this takes place at about 4 1/2 cookies.
I encourage you to try this for yourself; as long as identical successive units of the
same commodity are consumed, the law of diminishing marginal utility will hold.
Of course, a model such as this, with only one product, no prices, and therefore no worry
about income or budget, is not entirely realistic -- but these layers are the next step.
NEXT TIME: Consumer equilibrium TRANSCRIPT00(MICRO) EPISODE 17: CONSUMER THEORY