• Ahousehold’s preferences determine the benefits or satisfaction a person receives
consuming a good or service.
• The benefit or satisfaction from consuming a good or service is called utility.
• Total utility is the total benefit a person gets from the consumption of goods. Generally,
more consumption gives more utility.
• Total utility from a good increases as the quantity of the good increases.
• Marginal utility is the change in total utility that results from a one-unit increase in the
quantity of a good consumed.
• As the quantity consumed of a good increases, the marginal utility from consuming it
decreases. (utility has been divided into more part, thus, marginal utility decrease)
• We call this decrease in marginal utility as the quantity of the good consumed increases the
principle of diminishing marginal utility.
The Utility-Maximizing Choice
• We can find the utility-maximizing choice by looking at the total utility that arises from each
• The utility-maximizing combination is called a consumer equilibrium.
Choosing at the Margin
Aconsumer’s total utility is maximized by following the rule:
• Spend all available income.
• Equalize the marginal utility per dollar for all goods.
The marginal utility per dollar is the marginal utility from a good divided by its price.
Total utility is maximized when goodAand good B have the same marginal utility per dollar.
• If MUa/Pa > MUb/Pb, then MUa decrease and MUb increase
• If MUa/Pa < MUb/Pb, then MUa increase and MUb decrease
Predictions of Marginal Utility Theory
A Fall in the Price of a Movie
• When the price of a good falls the quantity demanded of that good increases—the demand
curve slopes downward.
• For example, if the price of a movie falls, we know that MUm/Pm rises, so before the
consumer changes the quantities bought, MUm/Pm > MUp/Pp.
• To restore consumer equilibrium (maximum total utility) the consumer increases the movies
seen to restore MUm/Pm = MUp/Pp.
A Rise in the Price of Pop
• We know that MUp/Pp falls, so before the consumer changes the quantities bought,
MUp/Pp < MUm/Pm.
• To restore consumer equilibrium (maximum total utility) the consumer decreases the
quantity of pop consumed to and increases the quantity of movies seen to drive down MUm.
• These changes restore MUm/Pm = MUp/Pp.
• Arise in the price of pop decreases the quantity of pop demanded—a movement along the
demand curve for pop. A Rise in Income