1.7 consumer behaviour + utility

what’s utility?

the satisfaction, well-being, or value that an individual derives from consuming goods + services

→this is a subjective concept, meaning the way its measured isn’t concrete

e.g.The utility you get from the pizza is the satisfaction/benefit you receive from consuming it.

utility = satisfaction from consuming a good or service.

disutility:no benefits from consuming a good

M A R G I N A L

refers to the additional satisfaction or utility gained from consuming one more unit of a good or service

The marginal utility of each slice is the extra satisfaction from eating one additional slice.

For example:

• 1st slice → +10 utils

• 2nd slice → +8 utils

• 3rd slice → +5 utils

So the 3rd slice has marginal utility of 5 utils.

D I M I N I S H I N G M A R G I N A L

states as a person consumes more units of a particular good or service while keeping the consumption of other goods constant, the additional satisfaction gained from each additional unit will decrease

e.g.Notice:

10 → 8 → 5 → 2

Your marginal utility is getting smaller as you consume more pizza.

Why? Because you're becoming more satisfied/full, so each additional slice gives you less extra satisfaction.

That's diminishing marginal utility:

The law of diminishing marginal utility states that as a consumer consumes more units of a good, the additional satisfaction gained from each extra unit tends to decrease.

T O T A L

Total utility (TU) is the total satisfaction a consumer gains from consuming a given quantity of a good or service.

Easy memory:
Total utility = all the satisfaction added together.

R E L A T I O N S H I P B E T W E E N MU + TU

Marginal utility (MU) is the change in total utility (TU) from consuming one additional unit.

So MU determines how TU changes.

e.g. imagine eating slices of pizza:

• 1st slice → MU = 10 → TU = 10

• 2nd slice → MU = 8 → TU = 18

• 3rd slice → MU = 5 → TU = 23

• 4th slice → MU = 0 → TU = 23 ← maximum TU

• 5th slice → MU = −3 → TU = 20

Notice that MU can be decreasing while TU is still increasing. That's because MU is still positive.

As long as marginal utility is positive, total utility increases; when marginal utility is zero, total utility is at its maximum; and when marginal utility becomes negative, total utility decreases.