This is why I want to go to a great school like this one. Not because I'm some kind of genius, but because I think, with the right teacher, anyone can be a genius. And at schools like MIT, every teacher is equipped to teach effectively.

Notes: Demand curve - how consumers make choices Decision making - Utility maximisation. Consumer preferences - what people want and budget constraints - what they can afford. Step 1 - Preferences - how do we model people’s taste - Unconstrained choices, money is no object, how do we think about what we want. Preference assumptions. Models are based on simplifying assumptions. Are they roughly consistent with reality or not? Completeness - We have preferences over any set of goods we choose from. Can’t say I don’t know how I feel about this. Transitivity - If we prefer A to B and we prefer B to C then we prefer A to C. Non-satiation/More is better - More is always better than less. Graph of people’s preferences. Indifference curves. Graphical maps of preferences. Suppose parents gave money before semester. Spent on two things - buying pizza or eating cookies. 2 dimensional decision case. Consider 3 choices A. 2 pizzas and 1 cookie B. 1 pizza and 2 cookies C. 2 pizzas and 2 cookies. Assume - We are indifferent between these packages. Equally happy with all the packages. And also assume we prefer option C as more is better. One indifference curve between A & B because those are the points among which you’re indifferent. Indifference curve represents all combinations of consumption among which you are indifferent. You are indifferent between A & B and therefore they lie on the same curve. 4 properties that you have to follow from these assumptions: Prop 1 - Consumers prefer higher indifference curves = More is better. Package that has at least more of 1 thing than the other so you prefer it. As the curve shifts out you are happier because more is better Prop 2 - Indifference curves are downward sloping. Comes from Principle of non-satiation. Why does it violate the principle of non-satiation? You cannot be Indifferent about 1 of each or 2 of each. Prop 3 - Indifference curves never cross. Because in B & C, B is strictly better but they’re also on the same curve as A. You’re indifferent with A for both B & C but you can’t be indifferent between B & C because B is strictly better than C. Indifference curves crossing violates transitivity. Prop 4 - Only 1 indifference curve through every possible consumption model/ Only one indifference curve through every bundle. You can’t have 2 indifference curves in the same bundle because of Completeness. If this did happen you wouldn’t know how you felt. You may feel indifferent but you can’t say you don’t know how you feel. Example - year op as a grad student who had to decide where he would accept the job. I am indifferent but I care about 2 things - school location and economics department quality (quality of my colleagues and the research that’s done there) One is from Princeton and the other is Santa Cruz (not as good as economics department). 3rd offer - IMF research institution in DC and had a lot of good colleague and DC is way better than Princeton. Worst quality than Princeton and worst location than Santa Cruz but it was still better in combination than these two institutions. Utility Functions - Mathematical representation - Every individual has a stable well behaved underlying mathematical representation of your preferences which we call utility function. 2 dimension - how do we mathematically represent between pizza vs cookies. Utility function is no. of slices of pizza vs no. of cookies. U√P*C. What is Utility? It doesn’t mean anything. Its not a cardinal but an ordinal concept. Assume you can rank your choices in many dimensions. Weigh different assumptions so you can rank them when you need to choose. Marginal utility - 1 cookie and then the value or utility of the next cookie. Marginal decisions. Once you eat an cookie, do you want the next unit/cookie/pizza? Key feature - Diminishing Marginal Utility - the more of you’ve had of a good the less you would want the next unit. No. of cookies holding constant pizza. If you’re having 2 pizza slices and you want to say what’s my benefit from the next cookie. Left axis - violating the above we graph utility. Eg. If you have 1 cookie your utility is 1.4; square root of 2 times 1. If you have 2 cookies the utility goes up = square root of 4 which is 2. You’re happier with 2 cookies but you are less happy with the second cookie as you were with the first cookie. The 1st cookie gave you 1.14 utility. What’s your happiness is measured in this graph of marginal utility. The next cookie’s utility is 2.059. Each additional cookie makes you less and less happy. Makes you happy as more is better but less happy as the 1st cookie. Remember you always want more cookies. You can say that the 11th will make you barf. But in economics you can give it away or save it for later, worst case you can throw it out, but you always think more is better. Utility function can never be negative, as its an ordinal concept, and is always positive as you get some benefit from the next unit. Indifference curves are the graphical representation of what comes out of utility function. Slope of the indifference curve is called marginal rate of substitution. The rate at which you’re willing to substitute one good for another. Substitute cookies for pizza. dp÷dc = marginal rate of substitution. I am indifferent between point A & B. Over here 1 slice of pizza = 1 cookie. Marginal rate of substitution is -2. I am ready to give 2 pizzas for 1 cookie. When we move from B to C the MRS is -½. Now I’m willing to give only 1 slice of pizza for 2 cookie, because we don’t want cookie as much due to diminishing marginally utility. MRS is always diminishing, it has to. Slope will always be falling. How MRS relates utility function; MRS=DP÷DC= -MUc÷MUp (c - cookie and p - pizza). MRS tells you how relative marginal utility evolves as you move down the indifference curve. When you start at point A, you have lots of pizza and not a lot of cookies; here your marginal utility is small. Marginal utility are negative functions of quality, the more you have it the less you want it. As you move along the indifference curve, you’re more willing to give up the good on the x-axis to get the good on the y-axis. Implies that indifference curves are convex to the origin. They’re not concave, they’re either convex or straight. It can be linear. What would happen if indifferent curves were concave to the origin? From point A to B leaves you indifferent so You can give 1 slice of pizza to get 1 cookie, starting to give 4 pizzas for 1 cookie. From 2 and 3 you are willing to give 2 pizzas for 1 cookie. This violates principle of MU and MRS as pizzas should be more valuable as you have less pizza now. Addictive decisions - Smoking. Utility function shifts as you get more addictive. The next will be still be worth less. But as we’re addicted the first cigarette will be worth more and more to you. When you wake up feeling crappy the first cigarette will be good to you but the next morning you wake up feeling crappier and wanting the first cigarette more as people get habituated to certain levels. For drugs its not about diminishing MU but different underlying products used in the drug. Example - Prices of different sizes of goods. Starbuck tall coffee for $2.25 and the next one for 70 more cents. McDonald - Small is $1.22 but for 50 more cents you can double the size. Why do they give twice as much for much less than twice as much money? Its all about diminishing MU, you’re desperate for the first soda on a hot day, but not twice as much for the next glass. Those prices reflect market’s reaction to diminishing MU. If you think about demand and supply, the demand for 1st 16 ounces is higher than the demand for the 2nd 16 ounces, but the cost to produce the drink is the same. Since the demand for the next 16 ounces doesn’t shift twice as much, you can only charge 50 cents for the next 16 ounces. Price increments get smaller because of diminishing MU. Buying in bulk from Costco is not much less than buying single units from supermarkets as the price gap between the soda example. Even though you might get thirstier later in the day for another glass of soda, they won’t let you walk in with the first cup you bought from them. Eg. Fenway small soda - $6, bigger soda - $8, refillable soda cup - $10. Can you bring the $10 refillable cup back to additional games? No.

Now I know the difference between MIT and DU. Not the curriculum but the faculty.

This person makes me enjoy these lessons. I have to spend three semesters on Micro and Macroeconomics and I didn't understand as much as I do now when this person is teaching! For once, the marginal utility of these lessons doesn't diminish for me! Thank you MIT open course! And thank you, Professor Gruber.

01:13 Model Assumptions 05:54 Indifference Curves 09:23 - - > Four Properties 13:27 - - > Real Example ( job search ) 15:28 Utility Functions 18:31 - - > Margin Utility 24:49 Marginal Rate of Substitution 30:13 - - - > Why graph's not concave 32:37 - - - > (Q) Addictives & MRS 34:31 Price of Different Sizes of Goods

Microeconomics L-2 A. Utility Curves A.1.Assumptions A.1.1. Completeness - You can mark preference on any item. Inversely, you cannot say you feel 'indifferent' about it. A.1.2. Transitivity - If A preferred over B and b over C then A is preferred over C. A.1.3. Insatiable - More is better than less. A.2. Draw Utility curves now: Ordinal and not cardinal metric (i.e., you cannot be certain about by how much A is bigger than B but definitely rank A and B) A.3. Properties A.3.1. Only one utility curve for a bundle - Completeness property (i.e., preferences cannot be uncertain or non-existent). A.3.2. Utility curves cannot cross each other - Transitivity (if crossed, A=B and A=C but A>C). A.3.3. Utility curves are negatively slopped - Insatiability (If positively slopped, More is equally preferable to less). A.3.4. Not concave to the origin - Violates Marginal diminishing utility (If concave, you'll be willing to substitute more goods of one type by an equal number of competitive goods when you have less of it). B. Marginal Utility B.1. The utility of the next unit of A relative to the amount of A you have now. Basically del(U)/del(A). B.2. Properties: B.2.1. Utility will increase but Marginal utility will be diminishing (Not concave to the origin). B.2.2. Though the Marginal utility is decreasing, the value must be non-negative. (Design Utility eqn accordingly). B.2.3. MRS (Marginal rate of substitution) = slope of the Utility curve = Marginal Utility of Item on the x-axis/Marginal Utility of item on the y-axis. B.2.4. Explanation of 3: delta A (the number of items A willing to be exchanged) is inversely proportional to the Marginal Utility of A at the given point for a given amount of item B. C. Other discussions: C.1. For additive items, it's not that the Marginal utility is increasing (it's diminishing in this case too) but the Utility function shifts. C.2. Why are price increments less than the proportional increment in the amount? - Refer Point 3 and 4 in Marginal utility. (Will be adding notes as I progress in the course based on my understanding of the material).

I really appreciate MIT open courseWare, helping me alot in learning my MicroEconomics Theory course

respected professor teaches in very simple manner believe me i am a biology student

I'm getting addicted to these lecture videos. The way Dr. Gruber teaches Microeconomics is fascinating. He is so wise.

Whenever they present a concept i immediately look forward to the example because it makes so much sense

Prof. Gruber and his MIT students were on fire. What a terrific lecture and insightful Q&A.

This lectures help me a lot in understanding economy concepts and theories. Thank you!! Also, I totally admire the class interactions.

For those of you doing the assignments and feeling like you've missed a lot with the math behind demand curves, you definitely have. If you're looking for a more in depth class that covers the math (which is quite important), I recommend the 2011 version of this course also on MIT open courses. The optional textbook also covers it if you prefer to read.

really love the part where he explains MRS = - MUc/MUp!!!! I understood it intuitively and graphically! Thank you so much!

I wish our teachers could teach like that. Sooooooo helpful and simple .💜💜💜thank you so much😗

Wow, I didn't realise there was a new edition! I'd seen his last version from 2011 and it's really neat to see this one too.

I love this professor. He explains stuff so well. I currently also have a eco class at my university (Leiden University) which is also quite a good university, but I always come here to watch his lecture to really understand the topic haha

Woah, simplifies everything to the core so you get a deeper understanding in every aspect. Heads up for the prof!

these topics where the first topics in my microecomonics classes and i was so sad that i didnt understand them. I thought i was stupid or something since i had bad grades in my math classes at high school, but i understood everything quickly with this man, he is def a great teacher with amazing skills of simplification. Thanks for the open courses from one of the top universities! It is really helpful especially for those who can not afford to study in top rated schools

Thank you Proffesor for letting this lectures online, I study my micro lessons with these lectures ^-^

Thank you so much for this excellent free education.

Well explained and presented with simple but realistically-based examples!

So efficient and useful Intro Econ Courses, thank you for sharing these precious videos with us and also appreciate his help (thanks sir) , I easily understood the parts that I haven't understood in my real classes :-)

Man, thought I was hooked on TED Talks...love these MIT lectures !

This is an amazing resource for my Microeconomics for Policy Analysis course at the U of MN. Needed some help with my homework and found this lecture. Thanks MIT for posting this to help other students. Great lecture, very good examples and easy to understand. Thank you!!!

Prof Gruber r the best thing that ever happened to me, thank you for posting

Wow, this lecturer is amazing! Thank you MIT!!!

Thank you Mit and prifessor Gruber for the useful lesson 🥰

Great explanation. Im a data engineer trying to transition to economics field. This playlist is helping me understand the optics of economics. Thanks so much @MITOpenCourse and Prof. Jonathan Gruber.

The fact about Smoking is so true, Every single One Diminishes its taste after the othor one, and gives you a ton of problems that you were not having before. I like the fact that there is no big price different between the big giant Juice Drink and the Increase of their number. Because they know your appetite goes satisfactory after the previous one.

I’m an engineer and loving the lectures! So we’ll presented!

Definitions and Notes 1. Assumptions: more is always better, there are no budget constraints for this class's thought experiments. 2. Indifference curves: An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility. 3. Four properties of Indifference curves: (i) People prefer higher IC (ii) Indifference curves never intersect. (iii) Indifference curves are downward sloping (iv) Only 1 I.C through every bundle 4. Preferences: In economics and other social sciences, preference is the order that a person gives to alternatives based on their relative utility, a process which results in an optimal "choice". Preferences are evaluations, they concern matters of value, typically in relation to practical reasoning. 5. Utility: Economists use the term utility to describe the pleasure or satisfaction that a consumer obtains from his or her consumption of goods and services. It is a subjective measure of pleasure or satisfaction that varies from individual to individual according to each individual's preferences

He is a great teacher. I hven't seen such appreciation and encouragement from teachers.

This professor is amazing. I wish mine were as good at explaining econ like him.

Just watching some other lectures from different teachers just shows me how widely different the teaching methods are between them. My teacher for example never went into indifference curves for example when discussing utility.

Thank you for these videos. Easy to grasp and well explained.

This is a great lecture! Thanks MIT Opencourseware

He's a great teacher who explains very well

Finished, so appreciated of sharing, great instructer.

EXCELENTE CLASE. gracias ¡¡¡¡

Happy to see so many fellow Indians in the comments. It shows we are knowledge hungry. Its sad we don't have these kind of professors in India even in elite schools like IIT.

Thank you Prof Gruber.

Great eye opening lecture.

Well my economics Professor in Germany did an equally good job (albeit in German)... I'm watching this to correlate the terminology in English. He used the most German Example ever! Beer and Wine!😝🤣

I dont know why I'm doing this to myself, but I am still in highschool and your boy here trying to learn some university materials, I feel very proud😂😂

Professor thank you so much!

Today I am happy because to first time I find your page and I can learning science of the day because I am Iranian and here there aren't science of day . Tank you so much of MIT University to open course ware

I am falling in love with this

for the diminishing marginal utility function, the partial derivative with respect to cookies is = 1/(2*sqrt(p*c))*p, so the MUF with cookies=1 is 0.7, not 1.4. same result with the first derivative with constant p=2

Holy fuck MIT classes public. Awesome.

thank you professor and MIT !

Estou adorando as aulas com este professor, thanks ;)

I like how his chalk will just snap in half and he'll just keep on going without batting an eye.

this lecture is realy good

This is quality education of MIT, very useful.

Great explanation. Liked it very much.

The best presentation.

thank you so much this class really helped me

*Assumptions* Completeness Transitivity Non-satiation 9:23 Four properties of indifference curves -Consumers prefer higher indifference curves -Indifference curves are downward slopping (Non-satiation) -Indifference curves never cross (Transivity) -Only one IC through every bundle 15:01 Utility functions Marginal utility 24:34 Marginal rate of substitution Indifference Curves are convex to the origin 32:38 Real life example of diminishing marginal utility 🔥

I’m learning about this!

This is so easy in comparison to what we study in india.

His voice is pretty young

Now I know the difference between MIT and MU.not the curriculum but the faculty.

Wonderful lesson.

Great lecture

Thanks Prof

Slight correction on opioids: Very few people switched from Oxycontin to heroin of their own volition. To say they did so actually buys into an Oxycontin-->heroin gateway drug theory, which is very dubious, like most other gateway drug theories. Most people who switched from Oxycontin to heroin did so after their Oxycontin supply was cut off. The overdose rates would be lower-- still too high, but much lower than at present-- if we hadn't cut people off (whether pain patients, addicts, recreational users, or whatever combination thereof) off of their prescription opioids.

Cigarette discussion was amazing !

Great Video and for figure 2-5, y-axis should be dU/dC instead of Utility.

I'm showing more class participation here than my actual class. I genuinely saying out the answers to his questions loud while my profs make me feel as if there's something wrong with coffee nowadays

These lectures are fire 🔥 wish that was my professor

on @31:31, even if it does make sense mathematically, once you gave one slice of pizza for one cookie, on the second trade, it does make sense to trade 2 slices of pizza for one cookie. I know this is theoretical, but it does not count the diabetes variable :P. that said, wonderful course!

even non-economics students can understand his lecture, maybe this is what a good teacher is.

32:03 Bless you person who sneezed

You can't know if the second movie will not so exceed your expectations as to make you happier. Your a priori assumptions may be incorrect. But it is impossible to know this- a priori. Use upward sloping curves when one is a cost for the other. The cost for three of something may be more than three. As when marginal utility declines, as minimal cost (of production) is still additive. Oh! "The cookie monster:" Alone on a dark street: The marginal utility of a cookie. He sighed, looking up. Something to think about.Thank you again, Professor Gruber. I found your course useful and fun. My idea if fun, of course. And- The pizza will get cold.

FENTANYL is mostly produced in the Golden Triangle( consisting of areas in Myanmar, Laos and Thiland) not in China.

This Guy is AWESOME!!

as stated in the sense "next unit bring less joy than the previous held units" but what if the next unit is equal to whatever the initial amnt unit you are holding atm as in having x amnt of said stock instead of getting x+1 ;x+X amnt .technically its multiple singular units but will it affect the indifference graph when given coupled together ? (is this a rational question or am i missing something?)

It's the aggregate behaviour of indifference curve which show's the cross section of indifference curve.

25:58 how is he getting negative 2? Slope is y/x right? So shouldn't it be positive 2?

Can someone please answer this question ? We've seen that because of diminishing marginal utility, the demand curve shift less the more the quantity you want to buy. But since the spacing is less and less, and if we suppose we have an infinite demand, will it converge toward a fixed quantity ? My mathematical intuition tells me that's the case, but my economic intuition tells me that infinite demand needs infinite supply since not every agent in the economy will be at the same position in the utility function; for any number of agent there will be at least one that's going to buy it's first item and will want more, meaning that demand will increase.

GREAT VIDEOS

Wow really good prof

At 26:54, when we are moving from Point A to B, and then B to C, MRS is changing from -2 to -0.5, respectively. But it's increasing not decreasing and in theory we are saying when we moves along indifference curve, MRS slopes downwards. I didn't get the context...can anyone explain it to me?

# Preferences and Utility Functions NOTES - **Demand Curve** - represents how consumers make choices - **Supply Curve** - represents how firms make production decisions - Consumer decision making is a model of **utility maximisation**. Two components: - [1] **consumer preferences** - what people want - [2] **budget constraint** - what they can afford - In this lecture we are focussing on preferences - how do we model people's tastes? (Graphically) - A) Preference Assumptions: 1. Completeness - you have preferences over any set of goods. You can be indifferent 2. Transitivity - If you prefer A to B and B to C, you prefer A to C 3. Non-satiation - More is better than less (NOT that the next unit will make you equally happy!) - Indifference Curves represent all combinations in which you are indifferent - Four properties of Indifference Curves 1. Consumers prefer higher indifference curves (Principle more is better than less) 2. Indifference Curves are downward sloping (Principle of satiation) 3. Indifference Curves never cross (If IC crossed it would violate principle of transitivity) 4. Only one IC through every bundle (Principle of completeness) - Utility Functions (Mathematically) Utility is an ordinal concept - you use it to rank preferences. This function allows you weight the different elements of your consumption bundle Simple, but powerful way to explain decisions - Marginal Utility - Very important concept - it is a derivative of the utility function with regards to one of the elements - Marginal Utility of Cookies is the utility of the next cookie. - Compare with the question how many cookies do you want? (more difficult question) compared with do you want another cookie? - Key feature of utility functions: They will feature diminishing marginal utility. The more of a good you've had the less happiness you will derive from the next unit. - Marginal Utility is never negative - more makes you happier or at least indifferent - The indifference curve gives you the **Marginal Rate of Substitution** - the rate at which you are willing to substitute cookies for pizza. MRS is always diminishing. - **Marginal Utilities are negative functions of quantity - the more you have of a thing the less you want the next unit of it** - Indifference curves are convex to the origin - (a concave indifference curve would violate the principle of diminishing marginal utility)

Could someone explain to me how businesses then account for that discount in price to still make profits since the production costs don't change

Thank you sir !!

Excellent 🌷

why the first assumprion is called "completeness" when it's meaning is closer to personal preferences?

Sir i don't know i am having ur previous lecture they are as good as these are.

Opportunity cost of watching these videos is amazing

I know he went over addiction and marginial dimishing return at the end but i am curious to know what professors thoughts on marginial diminishing return and money is?..shouldn’t billionaires want less and less money as they make more but it seems like it doesn’t work that way? The more money someone has, the more they want?

Watching this kind of videos reminds me of Isaac Asimov saying decades ago the possibilities of learning with the invention of modern computers and internet. I’m on the subway in Latin America watching lectures of MIT, come on! 🤷🏼‍♂️

I just understood the Mrs = ∆p/∆c = -MUc/MUp , with all the math i know, it's basically the slope in partial derivative form

Can someone explain the last question that the girl asked?

Law of Diminishing MU… can we take advantage of the firms based on this law? Example… L soda is 1.50, XL soda is 2.00 and is 2x as much. Consumers should purchase 1 XL and split it thereby saving 1 dollar. We see this happen a lot at the movie theater concession counter.

Thanks!

Does that make the marginal rate of substitution the derivative of the marginal utility rate? Or does the gradient always have to be an average rate of change rather than the gradient of a tangent?

For the last question, I think we are talking about different decision, scenarios which mean the indifference curve shift, so we cannot compare the marginal utility in this case

Thanks a bunch