Marginal Utility

Income effect

Decrease price of a good saves more money therefore more buying power therefore more income

Substitution effect

If two goods are substitutes and one is cheaper, will switch to the cheaper goods so that we have more money left over to buy more stuff

The law of diminishing marginal utility

The added satisfaction declines as you acquire additional units of a good

Utility

The level of happiness or satisfaction you get from consuming a good

Utils

Imaginary measurement of utility

Total utility (TU)

The total amount of happiness or satisfaction you get from consuming a good

Marginal utility

The extra satisfaction that you get from an additional unit of a good

What is the equation for calculating marginal utility?

MU = change in total utility divided by change in quantity

The utility maximizing rule

Use when you want to find maximum utility and you have two goods

What is the utility maximizing equation?

(MU of A/P of A) = (MU of B/P of B)