7.1 Utility

Total utility is the satisfaction from consuming a given quantity. Marginal utility is the change in total utility from consuming one additional unit: MU = change in TU divided by change in quantity.

If marginal utility is positive, total utility rises; if it is zero, total utility is at a maximum; if it is negative, total utility falls. The law of diminishing marginal utility says successive units often add less satisfaction, holding other conditions constant.

If total utility rises from 40 to 52 when consumption increases from 2 to 3 units, marginal utility of the third unit is 12 utils.

Diminishing marginal utility does not mean total utility immediately falls, and utility is an analytical measure rather than a directly observed physical substance.

Diminishing marginal utility means that, as consumption of a good increases, the marginal utility of each successive unit tends to fall, holding other conditions constant.

Total utility can still rise while marginal utility is positive. Once marginal utility reaches zero, total utility is at its maximum; if marginal utility becomes negative, total utility falls. The pattern supports a downward-sloping demand curve in the simple model.

The first cup of water to a thirsty person may add 20 utils, the second 12, and the third 5. Total utility is still increasing, but each extra cup matters less.

Diminishing marginal utility is not the claim that every good always has the same numerical pattern or that total utility immediately decreases.

The equi-marginal principle says a consumer allocates spending so that the marginal utility gained from the last unit of money is equal across goods: MUx/Px = MUy/Py, subject to the budget.

If one good gives more utility per dollar, shifting a small amount of spending toward it raises total utility until the ratios equalise or a corner solution is reached.

If the next unit of tea gives 18 utils at $3 (6 utils per dollar) and fruit gives 8 utils at$2 (4 utils per dollar), the consumer should shift spending toward tea before claiming the bundle is optimal.

The rule compares marginal utility per price, not total utility or marginal utility alone, and it assumes the prices and preferences used in the calculation are relevant.

A consumer’s individual demand curve shows the quantity chosen at each possible price, holding income, preferences and other relevant prices constant.

At each price, the consumer chooses the affordable bundle that maximises utility. A lower price changes the budget constraint and the marginal-utility-per-price comparison, producing a new chosen quantity. Joining those price-quantity choices gives the curve.

If the price of coffee falls while income and tea’s price stay fixed, coffee becomes more attractive per dollar and the budget line rotates outward around the tea intercept; the optimal coffee quantity may rise.

A movement along a demand curve is caused by the good’s own price; a change in income or preferences shifts the curve instead.

The marginal-utility model is useful for explaining choice, but it simplifies preferences, information and measurement. Utility units are analytical devices, not directly observable physical quantities.

The model may assume stable preferences, rational choice, divisible goods, diminishing marginal utility and independence between goods. Complements, substitutes, habits, uncertainty and behavioural biases can weaken the simple prediction.

A collector may value a tenth item more than the first because of a set-completion effect, contradicting a strict diminishing pattern while leaving the model useful for other goods.

A model assumption is not an empirical law; use the theory to predict under stated conditions rather than treating every deviation as a calculation error.