Utility Flashcards
Utility
The satisfaction received from consumption of goods or services.
Relationship between total utility and level of consumes
The more a consumer consumes, the larger his or her total utility will be.
Total utility
Total satisfaction received from consumption.
Marginal utility
Utility derived from the consumption of one more unit of good or service.
Positive marginal utility
When consumption of an additional item increases the total utility.
Negative marginal utility
When the consumption of an additional item decreases the total utility.
Graph of total utility
X-axis: Quantity
Y-axis: Total utility
Write ‘Total utility’ at the edge of the graph
Explanation:
> as consumption increases, there will come a point where marginal utility is negative, indicating dissatisfaction and disutility
Diminishing marginal utility
When the marginal utility gained from consumption of a product tends to fall as consumption increases.
Equimarginal principle
Where the consumers maximise their utility where their marginal valuation for each product consumed is the same.
Marginal valuation is the marginal utility over price.
MUa/Pa = MUb/Pb
Derive an individual demand curve
- Law of demand: inverse relationship between price and quantity demanded.
- Use MU/P, the value will fall as the price of good A increases.
- MUa/Pa < MUb/Pb (disequilibrium)
- To restore equality, MUa needs to increase.
> by consuming less of product A - Demand curve
X-axis: Quantity
Y-axis: Price
Assumption of marginal utility theory
Consumers act and behave in a rational way in their purchasing decision.
MU and total utility
MU falls as the consumption of a good increases.
When MU becomes 0, the consumers will not derive any more satisfaction by increasing consumption of that good.
Total utility is therefore maximised at this point.
