Utility
Utility
- Utility is the satisfaction from a good.
- total utility — from all units; marginal utility — from one more unit.
- Diminishing marginal utility: each extra unit gives less extra satisfaction (total still rises, but slower).
Practice
Diminishing marginal utility means that each extra unit consumed gives:
Marginal utility falls with each extra unit, so total utility rises more and more slowly.
The equi-marginal principle
- A consumer maximises total utility when the last dollar on each good gives the same extra utility:
$$\frac{MU_A}{P_A} = \frac{MU_B}{P_B}$$
- Because marginal utility falls, you only buy more at a lower price → the demand curve slopes down.
- Limits: utility can't really be measured; people don't calculate like this.
Practice
The equi-marginal principle says a consumer maximises utility when:
Utility is maximised when MU/P is equal across all goods.
Practice
Diminishing marginal utility helps explain why the demand curve slopes downward.
Later units are worth less, so consumers only buy them at lower prices.
You've got it
Key idea
- utility = satisfaction; marginal utility falls with each extra unit
- equi-marginal principle: $\frac{MU_A}{P_A} = \frac{MU_B}{P_B}$ maximises total utility
- diminishing marginal utility explains the downward demand curve