Chapter 7 - Utility maximization. In this chapter, the law of diminishing marginal utility is developed, which leads into a detailed discussion of the theory of consumer choice. The numerical illustrations of the utility maximizing rule should be viewed as a pedagogical technique, rather than an attempt to portray the actual choice making process of consumers. The chapter concludes with a discussion of how society might use this theory to reduce criminal behavior. | Chapter 7 Utility Maximization Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. In this chapter, the law of diminishing marginal utility is developed, which leads into a detailed discussion of the theory of consumer choice. The numerical illustrations of the utility maximizing rule should be viewed as a pedagogical technique, rather than an attempt to portray the actual choice making process of consumers. When this illustration is explained by “order of purchase,” the brief algebraic summary of consumer equilibrium should pose no great difficulties for most students. The chapter concludes with a discussion of how society might use this theory to reduce criminal behavior. Law of Diminishing Marginal Utility Law of diminishing marginal utility As consumption of a good or service increases, the marginal utility obtained from each additional unit of a good or service decreases . | Chapter 7 Utility Maximization Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. In this chapter, the law of diminishing marginal utility is developed, which leads into a detailed discussion of the theory of consumer choice. The numerical illustrations of the utility maximizing rule should be viewed as a pedagogical technique, rather than an attempt to portray the actual choice making process of consumers. When this illustration is explained by “order of purchase,” the brief algebraic summary of consumer equilibrium should pose no great difficulties for most students. The chapter concludes with a discussion of how society might use this theory to reduce criminal behavior. Law of Diminishing Marginal Utility Law of diminishing marginal utility As consumption of a good or service increases, the marginal utility obtained from each additional unit of a good or service decreases Explains downward sloping demand curve LO1 Although consumers’ wants, in general, are insatiable, wants for specific commodities can be fulfilled. The more of a specific product that consumers obtain, the less they will desire more units of that product. Theory of consumer behavior uses the law of diminishing marginal utility to explain how consumers allocate their income. Terminology Utility is the satisfaction one gets from consuming a good or service Not the same as usefulness Subjective Difficult to quantify LO1 Utility is a subjective notion in economics, referring to the amount of satisfaction a person gets from consumption of a certain item. Utility and usefulness are not the same thing. Items that are essentially useless can provide a lot of utility. Total Utility and Marginal Utility Util is one unit of satisfaction or pleasure Total utility is the total amount of satisfaction Marginal utility is the extra satisfaction from an additional unit of the good MU = ΔTU/ΔQ LO1 .
