30 - Utility Flashcards
Chapter 30:
What is Utility?
Utility is the satisfaction received from the consumption.
- Measured in utils
- Utility is subjective
- Change with time and place
Law of marginal diminishing utility (LDMU)
Give an example.
as consumption increases, the satisfaction from each successive unit of consumption decreases.
Utility when consuming pizza: The willingness to pay decreases as one consumes more.
Total Utility (TU) + Formula
The total/overall satisfaction received from the consumption of all the units of good in a given period of time.
Mu1 + Mu2 + Mu3….. Mu(n)
Marginal Utility (MU) + Formula
the utility derived from the consumption of one more unit of the good/service
Mu(n) = TU(n) - Tu(n-1)
Why does Mu fall
Explain the reason for LDMU
having obtained some amount of the good the desire to still consume more decreases.
5 Limitations
Limitations of law of diminishing marginal utility
- Utility is cardinal (expressed in numbers)
- Rational consumer is utility maximiser
- Reasonaable amount of the commodity should be consumed, (glass of water not teaspoon)
- Consumption has to be a continuous process (not after 2 hours )
- No change in the quality of the product
Equilibrium = total utility is max
Equimarginal principle + Formula
what happens when MUm (seek to derive) is 1
Consumers maximise their utility when their marginal valuation for each product consumed is the same.
mu(a)/p(a) = mu(b)/p(b) = mu(n)/p(n)
P = Price
When MUm =1
MUx = Px (price is equal to the marginal utlity derieved)
5 assumptions
The Equimarginal principle assumptuions
- Income is fixed
- Prices are fixed
- Tastes and prefernces are fixed
- consumer will behave in a rational manner and maximise their utility
- consumers can do utility calculations
How can individual demand curve be derieved from MU
Law of Demand = incraese in P leads to decrease in D
refer to page 305
