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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
