Marginal utility theory

Marginal utility theory

This is the total satisfaction derived from consuming one additional commodity

Total utility

All the satisfaction derived from consuming a good or service

Utility

The satisfaction derived from consuming a good

Marginal utility equation

Change in Total utility/change in quantity

The law of diminishing marginal utility

The law states that, as a consumer increases consumption of a good or service, the more of that good (or service), they consume, the less satisfaction, they receive from that good (utils are diminishing)

Consumer equilibrium

This is the level of consumption to achieve maximum utility

greater marginal utility/price

More consumption

The law of Equi-marginal returns/ Optimal Purchase

The law states that consumers allocate their expenditure on many items in such a way that the ratio of satisfaction per dollar spent (mu /p) is the same for all goods.

Assumption of the Marginal Utility Theory

Consumers are rational

Consumers are utility maximizers

There are two goods

Incomes are fixed

Prices of other related are unchanged

Prices are fixed

Consumers taste don’t change

Limitations

Satisfaction varies

Satisfaction is subjective