- [Instructor] We are now
going to introduce ourselves
to the idea of Utility in Economics.
Now in everyday language,
if someone says what's the Utility of that?
They're usually saying what's the usefulness
of doing that.
And Utility in Economics
takes that view of Utility
and extends that a little bit.
You could view Utility in Economics
as a measure of usefulness,
usefulness, worth, value.
Some economists will even say
it's a measure of happiness
'cause things that might not have a practical use
can still have Utility to them in Economics
because they're giving you some satisfaction
or some happiness,
or I'll even write that over here.
And as we'll see, it is something that economists
try to measure or try to quantify,
and they do it with just Utility units.
So let's see a tangible example of that.
So let's say you wanted to think about
your Utility from scoops of ice cream.
So if we say, let's make a col,
let's make a table here.
So number of scoops,
that'll be in my left column,
and then on my right column,
let's think about Total Utility,
and I will do it in utils.
You could view that as your unit of Utility.
And let me put my columns in here.
So, there we go.
And so let's say
if I have zero scoops of ice cream,
well you might guess
what my Utility is going to be,
it is going to be zero.
Now what if I have one scoop of ice cream?
Well let's just say that
that is 80 Utility units.
And I know what you're thinking,
Sal, where did you come with 80 Utility units?
And this is really just an arbitrary number
that I'm throwing down here.
What's more important is what this is
relative to my Utility for other things.
So, for example, using this scale,
if I said two scoops of ice cream,
my Total Utility is 140.
80 and 140 aren't what matter.
What matters is the ratio between the two.
So if I said my Utility
for one scoop of ice cream was 800,
then, if this ratio is true,
then for two scoops of ice cream,
my Total Utility would be 1,400.
It could be eight million and 14 million.
What matters is the relative Utility.
I just happened to anchor on one scoop
gives me eight units, Total Utility units.
But let's keep going.
If we go with this scale,
then three scoops of ice cream,
let's say that this gives me
180 units of Utility.
And I know what you're saying.
Even if you get the ratio right,
how do you even know that
this is the right ratio?
Well, economists will debate how to measure this,
but there might be ways that you could measure it
maybe with dollars,
with what people are willing to pay,
and then you can get the ratios.
You could survey people.
You could say on a scale of 10, one to 10,
how happy will it make you
if you got one scoop of ice cream?
What if you got two scoops of ice cream?
What if you got three?
And then you would wanna get these ratios right.
But, of course, it isn't an exact science,
but people are trying to quantity this.
Now let's just go to four.
Four scoops of ice cream
would give you a Total Utility,
let's say we knew it would give you
a Total Utility of 170.
Now something interesting is happening.
As you got more scoops of ice cream,
from zero to one, from one to two,
from two to three,
it looks like you're getting more Utility,
but then all of a sudden,
when you have four scoops of ice cream,
your Total Utility goes down a little bit.
Maybe it's because
people can't eat four scoops of ice cream
and they say what do I do with that?
And they just have all,
they're left with a bowl of melted ice cream.
And so it doesn't give them as much Utility,
it makes them feel bad somehow
as having three bowls of ice cream
or three scoops of ice cream.
Another thing to think about is
how much does the Total Utility increase
every time you get
an incremental unit of that thing?
And we'll talk about it in more depth
in future videos, but that general idea
of how much more Utility you get
for that incremental unit.
In Economics when we're talking about
what happens on the increment,
we use the word marginal a lot.
Marginal Utility,
sometimes abbreviated mu.
And this would still be in Utility units.
And so we could start with that first
going from zero to one.
I'll start with that first scoop of ice cream.
What's the marginal utility?
Well it gave you an incremental 80 units
of Utility, so the marginal utility is 80.
Now what about that second scoop of ice cream?
Well we know when you had one,
you had 80 Total Utility units,
and now when you have two, you have 140,
so that incremental second scoop
gave you to go from 80 to 140,
it gave you 60 extra units of Utility.
So notice, you are really,
it really increased your happiness or,
you got a lot of value out of that first scoop
and you still got value
outta that second scoop,
but it's a little bit less
because you're not maybe just as not as hungry,
you're getting a little bit tired
of the ice cream.
And then that continues to happen
on that third scoop, to go from 140 to 180,
that third scoop gave you 40 units of Utility.
And then as we talked about,
when you add on that fourth scoop,
it didn't even add to your Total Utility,
it took away from your Total Utility.
So it actually had a negative marginal utility.
It is negative 10.
That fourth scoop actually took away
from your happiness.
So I will leave you there.
You have this idea of Utility, Total Utility,
and we also looked at Marginal Utility.
And you see in this example,
and this is typical, that Marginal Utility
typically decreases as you get
more and more units of that thing.
And in future videos,
we're going to use this framework of Utility,
Total Utility, Marginal Utility,
to think about how folks
might make rational decisions
to optimize their Total Utility.