Marginal Utility Flashcards
What is the marginal utility theory?
It is a fundamental concept in microeconomics that explains how individuals make consumption decisions based on the additional satisfaction (utility) they gain form consuming one more unit of the good or service.
What is the theory based on?
The theory is based on the concept that individuals aim to maximise their total utility, but the satisfaction when consuming additional units decreases when consuming more. This is known as diminishing marginal utility.
What is total utility?
The total satisfaction an individual gets from all those units of a good consumers within a given time.
What is marginal utility?
The additional satisfaction gained form consuming one extra unit within a given time period.
How are total and marginal utility measured?
They are measured using utils, which refer to an imaginary unit of satisfaction from the consumption of a good.
What happens when the total utility reaches its maximum?
No extra satisfaction is gained, therefore marginal utility is zero.
What is negative utility?
When extra units of the commodity within the time period displeasures the person.
What happens at the beginning of the marginal utility theory graph?
At the beginning, it starts at zero because there is no satisfaction. Plus, marginal utility and total utility must be equal when only consuming one unit.
What is the marginal utility based on?
This is based on the Ceteris paribus assumption. Assuming that other factors do not change. since customers tastes, circumstances and consumptions change, another utility schedule would be created.
How do you calculate marginal utility?
Change in total utility/ change in quality.
