MARGINAL UTILITY

Marginal Utility

the extra satisfaction from consuming a good or service. (MU = TU2 - TU1).

Utility

the satisfaction from consuming a good or service.

Demand

the willingness and ability to buy a good or service.

Why MU leads to the downwards-sloping demand curve

As Consumption increases, MU decreases. The rational consumer attempting to maximize his satisfaction will be prepared to purchase up to the point where P=MU. Consumers will only purchase additional units at a lower price. The individual demand curve is therefore derived from the individual MU curve.

Law of diminishing marginal utility

As more of a good/service is consumed, the extra satisfaction (marginal utility) falls', i.e. (increase in Q → MU).

Optimal purchase rule

Consumers will maximize utility when they consume all goods until P =MU.

Equi-marginal rule/ Consumer equilibrium

MUa/Pa = MUb/Pb = MUc/Pc **The consumer will maximise their satisfaction if they meet the rule above and spend all of their money. For a consumer aiming to maximize total satisfaction and achieve consumer equilibrium they must satisfy these conditions: 1. Spend all their income 2. The marginal utility per dollar must be equal. i.e. MUa/Pa = MUb/Pb = MUc/Pc

Total Utility

combined satisfaction from consuming a good or service. (TU = MU1 + MU2...)

Substitute goods

goods/services that are bought instead of another good/service. Eg Coffee or tea

Complementary goods

goods/services that are bought to be used with another good/service. Eg Coffee or tea