Lecture 7 - Marginal utility theory(20/10/25)

Rational consumer behaviour - rational consumer chooses the combination of goods that gives them the highest possible satisfaction for the money they have.

Total and marginal utility

Utility - the satisfaction or pleasure you receive when consuming a good or service

Total utility (TU) is the total satisfaction a person gains from all those units of commodity consumed within a given time period.

Marginal Utility (MU) is the additional satisfaction gained from consuming one extra unit within a given period of time — TU/Q

Both can be plotted on a graph

The principle of diminishing marginal utility

The more of a product a person consumes, the less will be the additional utility gained from one more unit.

Marginal consumer surplus: MCS = Marginal Utility - Price

Total consumer surplus: TCS = TU - TE

Looking at only one commodity doesn’t account for the opportunity cost of another good, which is somewhat limiting to the data.

Background to demand

Inter temporal choice - It’s the choice between spending or consuming now and saving or consuming later.

Discounting: measuring impatience

Indifference Curves - see notes app

The impossibility of two indifference curves crossing (intersecting) shows irrational thinking - for there to be rationale thinking the individual cannot be indifferent between the two combination of goods - the utility is not equal

Optimum consumption is where satisfaction is maximised