Chapter 5

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Published on 13 Jun 2011
School
Ryerson University
Department
Economics
Course
ECN 104
Professor
Chapter 5: Consumer Choice and Utility Maximization
5.1 The Law of Diminishing Marginal Utility
As a consumer increases consumption of a good/service, the marginal utility (satisfaction) obtained from
each additional unit of the good/service decrease
Utility: want-satisfying power of a good/service; the satisfaction a person gets from consuming a
good/service
1.utility andusefulness are not synonymous
2.Utility is subjective
3.Utility is difficult to quantify
Total utility: total amount of satisfaction/pleasure a person derives from consuming some specific
quantity
Marginal utility: extra satisfaction from consuming one more unit
5.2 The Theory of Consumer Choice
Rational behaviour: use his/her money income to get the highest satisfaction
Preferences: buyers know how much marginal utility they will get from successive units
Budget constraint: limit that a consumer’s income imposes on the ability of that consumer to obtain
goods/services
Price: response to price changes
Utility-Maximizing Rule
To obtain the greatest utility, the consumer should allocate money income so that the last dollar spent
on each good/service yields the same marginal utility
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Document Summary

As a consumer increases consumption of a good/service, the marginal utility (satisfaction) obtained from each additional unit of the good/service decrease: utility: want-satisfying power of a good/service; the satisfaction a person gets from consuming a good/service. Utility and usefulness are not synonymous: utility is subjective, utility is difficult to quantify. Total utility: total amount of satisfaction/pleasure a person derives from consuming some specific quantity: marginal utility: extra satisfaction from consuming one more unit. 5. 2 the theory of consumer choice: rational behaviour: use his/her money income to get the highest satisfaction. Preferences: buyers know how much marginal utility they will get from successive units. Budget constraint: limit that a consumer"s income imposes on the ability of that consumer to obtain goods/services. To obtain the greatest utility, the consumer should allocate money income so that the last dollar spent on each good/service yields the same marginal utility www. notesolution. com.