NCEA L3 Economics 3.3 Micro-economic Concept 1 (Utility Theory and Demand)

The total satisfaction gained from consuming additional units of a good or service

The extra satisfaction gained from consuming an additional unit of a good or service

MU=TU₂-TU₁

As consumption of a good increases, holding all other factors constant, marginal utility decreases.

A rational consumer trying to maximise their satisfaction will only be prepared to purchase additional units of a good/service until the price equals the marginal utility that the consumer will receive from the additional unit of good (P=MU)

When a consumer is in equilibrium and the marginal utility of all goods are equal

MU_A/P_A=MU_B/P_B

Spend more on the good with the higher MU and less on the good with the lower MU. This should bring one MU down and the other one up, so they eventually should be equal

The law of diminishing marginal utility states that as we consume an additional unit of a good, holding all other factors constant, our extra satisfaction (marginal utility) received decreases. Furthermore, the optimal purchase rule states that a rational consumer trying to maximise their satisfaction will only be prepared to purchase additional units of a good/service until price equals the marginal utility that the particular consumer expects to receive from the purchase of the good/service. This means that if "name of consumer" consumes another "name of good" his extra satisfaction (Marginal Utility) from that "name of good" will diminish (fall). Therefore, for "name of consumer" to purchase another "name of good", the price must fall to ensure that the price is equal to or less than the marginal utility of that extra "name of good"

Spend more money on both goods until all income is spent

Spend more money on the good for which MU/P is highest

Nothing the consumer is already in consumer equilibrium

If MU of "name of activity not done"= "value of MU proving <", then "name of consumer" would be in equilibrium as the MU/P for both goods is the same. Given that she chose to do "name of activity done" over "name of activity not done", the MU/P for "name of activity done" must be greater than the MU/P for "name of activity not done". Since the price of "name of activity not done" was $"Price of activity not done", MU of "name of activity not done" must be less than $"Value of MU proving <" for MU/P of "name of activity done" to be greater than MU/P for "name of activity not done"

The optimal purchase rule states that a rational consumer trying to maximise their satisfaction will only be prepared to maximise their total satisfaction will only be prepared to purchase additional units of a good or service until price equals the marginal utility that the consumer will receive from the purchase. This means that in order for "name of consumer" to purchase another "name of good" the price must be at a level that is equal to or less than the marginal utility (extra satisfaction) that "name of consumer" will receive from the "name of good". Furthermore, because "name of consumer" is a rational consumer she will purchase the experience with the highest marginal utility per dollar. As "name of consumer" purchases more "name of good" the marginal utility that she receives from the "name of good" decreases. "name of consumer" will buy additional rides if the price decreases to match the lower marginal utility that she will receive. She was willing to purchase 1 experience for "insert relevant MU value" and would purchase two rides if the price decreases to "insert relevant MU value" this is why the demand curve slopes downward from left to right. Producers need these factors in their pricing decisions and recognise that consumers will only buy more at lower prices due to the law or diminishing marginal utility. This is why consumer orientated businesses offer multiple purchase discounts.