Law of diminishing marginal utility - Added satisfaction declines as a consumer acquires additional units of a given product

Utility - Want-satisfying power

• Not the same as usefulness

• Subjective - The utility of a product differs b/w people

• Difficult to quantify (but measured w/ utils)

Total utility - Total amount of satisfaction/pleasure a person derives from consuming some specific quantity

Marginal utility - Extra satisfaction gained from an additional unit

Law of diminishing marginal utility explains why the demand curve for a product slopes downward

• Consumer will only buy additional units of a product if its price falls

Theory of consumer behavior

• Rational behavior - Consumers are rational people who use income to derive the greatest amount of utility

• Preferences - Consumers have clear-cut preferences for available goods

• Budget constraint - Consumers have a fixed, limited amount of money income

• Prices - Every good carries a price tag

Utility-maximizing rule - To maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility

Consumer equilibrium - When the consumer has balanced their margins and has no incentive to alter their spending pattern

Consumer decision-making process

• Buy more of the good that provides more marginal utility per dollar

• Must choose a combination within the constraints of a consumer’s income

• Can obtain other combinations, but none will be as good as the one that provides the most total utility

Utility-maximizing rule

• Marginal utility of product A / Price of A = Marginal utility of product B / Price of B

• Equation not fulfilled → Reallocation of consumer expenditures will increase total utility

Utility maximization + the demand curve

• Product price + quantity demanded are inversely related

• Income effect - Impact that a change in the price of a product has on a consumer’s real income and the quantity demanded

• Substitution effect - Impact that a change in a product’s price has on its relative expensiveness and the quantity demanded

  • Substitute purchases towards goods that yield greater utility in order to restore consumer equilibrium