Utility, Diminishing Marginal Utility, and the Equi-Marginal Principle

Vocabulary flashcards covering utility, marginal utility, and the equi-marginal principles, along with related concepts from the notes.

Utility

A measure of happiness or satisfaction from consuming a good.

Marginal utility

The additional satisfaction gained from consuming one more unit of a good.

Total utility

The overall satisfaction derived from consuming all units of a good over a given period.

Diminishing marginal utility

The marginal utility obtained from each additional unit decreases as consumption increases.

Law of diminishing marginal utility

The principle that marginal utility falls as more of a good is consumed.

MU/P (marginal utility per price)

The ratio of marginal utility to price; used to compare how much utility per unit of currency each good provides.

Equi-marginal principle

To maximize total utility, allocate spending so that the marginal utility per price (MU/P) is equal across all goods.

Consumer equilibrium

A state where no reallocation of spending can increase total utility; achieved when MU/P is equalized across goods.

Demand curve

A graph showing how quantity demanded changes with price, derived from maximizing utility under a budget constraint; typically downward-sloping as price falls increases demand.

Budget constraint

The finite income available to a consumer to spend on goods.

Rational behavior

The assumption that consumers act to maximize their utility in a logical, consistent manner.

Limitations of marginal utility theory

Empirical evidence shows other factors beyond utility influence purchases; MU theory relies on strong rationality and complete ranking of wants.

Behavioral factors in consumption

Psychological and cognitive influences that affect purchasing decisions beyond stated utility or preferences.