Limitations of Marginal Utility Theory and Derivation of the Demand Curve

Flashcards reviewing the limitations of marginal utility theory and the derivation of the demand curve from diminishing marginal utility.

Utils

The numerical units that marginal utility theory assumes can be used to measure utility.

Subjectivity of Utility

A limitation of marginal utility theory stating that satisfaction is subjective and cannot be measured accurately, meaning utility cannot truly be measured.

Consumer Rationality Assumption

The assumption that consumers make rational decisions to maximise utility, which fails in reality because consumers can be influenced by advertising, habits, and emotions.

Independence of Goods Assumption

The assumption that the utility gained from one good is independent of other goods, which fails in reality because goods can be substitutes or complements.

Principle of Diminishing Marginal Utility

The economic principle stating that as a consumer buys more units of a good, the additional satisfaction gained from each extra unit decreases.

Downward-Sloping Demand Curve Derivation

Obtained by plotting marginal utility (or the maximum price the consumer is willing to pay) against quantity demanded, reflecting that consumers are willing to pay lower prices for additional units as marginal utility decreases.

Demand Curve

A curve that reflects the relationship between the price a consumer is willing to pay and the quantity of a good demanded.