Utility and Consumer Behaviour Lecture

35 vocabulary flashcards covering key terms, authors, assumptions and criticisms related to utility and consumer-behaviour theory.

Utility

The want-satisfying power or benefit a consumer gains from consuming goods and services; entirely subjective.

Marginal Utility

The additional satisfaction obtained from consuming one more unit of a good or service.

Total Utility

The cumulative satisfaction derived from all units of a good or service consumed.

Cardinal Utility Theory

Approach that treats utility as measurable in absolute numbers (utiles); central to Marshall’s demand analysis.

Ordinal Utility Theory

Approach that assumes consumers can rank bundles in order of preference without assigning numerical values to utility.

Revealed Preference Theory

Hicks, Allen and Samuelson’s view that a consumer’s preferences can be inferred from actual choices rather than measured utility.

Utiles

Imaginary units used in the cardinal framework to express the measurable amount of utility.

Law of Demand

Principle, derived from marginal utility analysis, that quantity demanded varies inversely with price, ceteris paribus.

Marginal Utility of Money (MUM)

The extra satisfaction from an additional unit of money; assumed constant in Marshall’s cardinal analysis.

Additivity of Utility

Cardinal assumption that total utility equals the simple sum of the utilities of each unit (TU = U1 + U2 + … + Un).

Diminishing Marginal Utility

Rule that marginal utility decreases as successive units of a good are consumed.

Independent Utilities

Assumption that the utility derived from one good is unaffected by consumption of other goods.

Introspective Method

Early technique whereby economists imagined the satisfaction a consumer feels to infer utility.

Principles of Economics (1890)

Alfred Marshall’s book that formalised cardinal utility measurement and the marginal analysis of demand.

Alfred Marshall

British economist who introduced cardinal measurement of utility and marginal analysis into mainstream economics.

John Hicks

Economist who, with Allen, developed ordinal utility and later contributed to revealed preference theory.

R.G.D. Allen

Collaborator of Hicks in formulating indifference-curve and ordinal utility analysis.

Paul Samuelson

Economist who formalised revealed preference theory in seminal papers of 1938 and 1948.

"A Note on the Pure Theory of Consumer's Behavior"

Samuelson’s 1938 paper that first set out the revealed preference approach.

"Consumption Theory in Terms of Revealed Preference"

Samuelson’s 1948 work that further developed and clarified revealed preference theory.

Jeremy Bentham

English philosopher who defined utility as any object’s capacity to produce pleasure or happiness.

Greatest Happiness Principle

Bentham’s idea that society should aim to maximise the total amount of happiness or utility.

William Stanley Jevons

Economist whose pioneering work on marginal utility helped launch the marginalist, or neo-classical, revolution.

Neo-classical Revolution

Late-19th-century shift in economics emphasising marginal utility analysis and formalised demand theory.

Law of Equi-Marginal Utility

Rule that a consumer maximises satisfaction when the marginal utility per unit of money spent is equal across all goods.

Assumption of Constant MUM

Cardinal postulate that the marginal utility of money remains unchanged during a consumer’s expenditure.

Divisibility of Goods

Cardinal assumption that goods can be divided into very small units so utility changes smoothly.

Amartya Sen's Critique of Utility

Sen’s argument that utility is an inadequate welfare measure because it ignores capabilities and adaptive preferences.

Gossen's First Law

Early statement of diminishing marginal utility: each additional unit of consumption yields less satisfaction.

Complementary Goods

Goods whose utility is enhanced when consumed together, challenging the assumption of independent utilities.

Subjective Nature of Utility

Idea that utility varies across individuals and cannot be objectively or universally measured.

Rational Consumer

Assumption that individuals aim to maximise satisfaction given income and prices.

Scarcity and Unlimited Wants

Condition underlying marginal analysis: resources are limited while consumer wants are virtually limitless.

Bernoulli's Contribution to MUM

Daniel Bernoulli first noted that marginal utility of money declines; Marshall later assumed it constant for simplicity.

Criticism of Cardinal Utility

Objection that utility cannot be measured in absolute numbers, making cardinal quantification unrealistic.