Th1.2: Diminishing Marginal Utility

Question 1

What does the demand curve sloping downwards show?

Answer 1

the inverse relationship between price and quantity - can be explained through diminishing marginal utility

Question 2

In order to predict how people will spend their money, what do we have to assume?

Answer 2

that they will act rationally - expecting them to spend it on what gives them the greatest level of satisfaction

Question 3

What does total utility represent?

Answer 3

the satisfaction gained by a customer as a result of their overall consumption

Question 4

What does marginal utility represent?

Answer 4

the change in satisfaction resulting from the consumption of the next unit of a good

Question 5

What does the Law of Diminishing Marginal Utility state?

Answer 5

the satisfaction derived from the consumption of an additional unit of a good will decrease as more of that good is consumed, assuming consumption of all other goods remains constant

Question 6

How does Diminishing Marginal Utility explain why the demand curve slopes down?

Answer 6

consumers are less willing to pay high prices at high quantities - less satisfaction