Utility and Demand Flashcards
What is utility?
A measure of the satisfaction gained from consuming a good or service
What is total utility?
The sum of satisfaction gained from consuming a certain quantity of a good or service
What is marginal utility?
The additional satisfaction gained from consuming each extra unit of a good or service
How do you find marginal utility?
MU = TU2 - TU1
What happens as quantity consumed increases?
Marginal utility decreases causing total utility to increase at a decreasing rate. Since MU falls, consumers are willing to pay less for the good.
What is the law of diminishing marginal utility?
As more of a good or service is consumed holding all else constant, total utility will increase at a decreasing rate.
What is the optimum purchase rule
A consumer attempting to maximise their total utility should purchase goods until P = MU. A consumer will buy more as long as the MU gained is greater than the cost of buying it.
How does a consumer decide what to buy when there is more than one good involved?
The consumer will first buy the good that provides the largest MU per $. They will then continue buying in descending order until all the money is spent.
What is consumer equilibrium used for?
To maximise total utility with limited income
When is a consumer in equilibrium?
When MU of good A/price of good A = MU of good B/price of good B
What is the paradox of value?
Refers to the idea of necessities like water having a low MU as they are consumed in large quantities which can be linked to the law of diminishing marginal utility
If the consumer is not in equilibrium how do you recommend they maximise their utility?
The consumer should spend more on the good that offers the higher MU/$
Why does the demand curve generally slope downwards to the right?
Law of diminishing MU –> optimum purchase rule; since MU falls the consumer will spend less so that P = MU –> quantity decreases as price increases
How do you make a demand schedule out of a utility schedule?
MU becomes price
Why does a consumer purchase more when the price falls?
Because maximum utility is when P = MU so if the price falls, P < MU. The consumer will then purchase more so that the price spent on the good will increase until P = MU and maximum utility is obtained
