Lesson: Consumption Choices

Choosing with Marginal Utility

Choosing with Marginal Utility

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  • Marginal utility focuses on how the consumer makes trade-offs between consuming less of one good and more of another. 

Most people approach their utility-maximizing combination of choices in a step-by-step way. This approach is based on looking at the trade-offs, measured in terms of marginal utility, between consuming less of one good and more of another. 

For example, say that José starts off thinking about spending all his money on T-shirts and choosing point P, which corresponds to four T-shirts and no movies, as the table below illustrates. José chooses this starting point randomly as he must start somewhere. Then he considers giving up the last T-shirt, the one that provides him the least marginal utility, and using the money he saves to buy two movies instead. The table below tracks the step-by-step series of decisions José needs to make (Key: T-shirts are $14, movies are $7, and income is $56). 


Try Which Has Total Utility Marginal Gain and Loss of Utility, Compared with Previous Choice Conclusion
Choice
1: P		 4 T-shirts and 0 movies 81 from 4 T-shirts + 0 from 0 movies = 81 –
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Choice
2: Q		 3 T-shirts and 2 movies 63 from 3 T-shirts + 31 from 0 movies = 94 Loss of 18 from 1 less T-shirt, but gain of 31 from 2 more movies, for a net utility gain of 13 Q is preferred over P
Choice
3: R		 2 T-shirts and 4 movies 43 from 2 T-shirts + 58 from 4 movies = 101 Loss of 20 from 1 less T-shirt, but gain of 27 from 2 more movies, for a net utility gain of 7 R is preferred over Q
Choice
4: S		 1 T-shirts and 6 movies 22 from 1 T-shirts + 81 from 6 movies = 103 Loss of 21 from 1 less T-shirt, but gain of 23 from 2 more movies, for a net utility gain of 2 S is preferred over R
Choice
5: T		 0 T-shirts and 8 movies 0 from 0 T-shirts + 100 from 8 movies = 100 Loss of 22 from 1 less T-shirt, but gain of 19 from 2 more movies, for a net utility gain of 3 S is preferred over T


José clearly prefers point Q to point P. Now repeat this step-by-step process of decision making with marginal utilities. José thinks about giving up the third T-shirt and surrendering a marginal utility of 20, in exchange for purchasing two more movies that promise a combined marginal utility of 27. José prefers point R to point Q. What if José thinks about going beyond R to point S? Giving up the second T-shirt means a marginal utility loss of 21, and the marginal utility gain from the fifth and sixth movies would combine to make a marginal utility gain of 23, so José prefers point S to R.