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Marginal Utility Theory


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budget line (prices of the goods and income)
The level of utility a consumer can achieve is limited by the _______ .
Utility
the amount of satisfaction one gets from a good or service
Diminishing marginal utility
the principle that as more of any good or service is consumed, its additional satisfaction or benefit (i.e. MU) declines
Marginal Utility (MU)
the satisfaction acquired from consuming each additional unit of a product
Calculation for Marginal Utility
change in total utility (TU) / change in # of units consumed (change in Q)
Total Utility (TU)
the sum of the marginal utilities of the successive units of a product consumed
Total Utility and increase in consumption
total utility increases with consumption as long as MU is positive; it reaches a maximum when MU is zero
Total Utility and decrease in consumption
total utility declines only if MU is negative
Consumer equilibrium/optimum
a consumer maximizes his/her total utility when the consumers income or budget is allocated in such a way that the last dollar spent on each good purchased yields the same amount of marginal utility per dollar
Consumer equilibrium/optimum equation
MUa/Pa = MUb/Pb............. = MUz/Pz
(look at the white packet)
Calculating consumer equilibrium when given income and prices of 2 goods)
The water-diamond paradox
water is more useful than diamond, but its price is much less than the price of diamond
The water-diamond paradox and MU theory
Price is determined by MU not by TU. The TU of water is higher; therefore its MU is lower. The TU of diamond is lower; therefore its MU is higher
Marginal utility and increase in consumption
MU declines as consumption of a produce increases
Marginal utility and decrease in consumption
MU increases as consumption of a produce decreases
Total utility calculation
all of the marginal utilities added up of the successive units of a product consumed