Utility:
Utility = satisfaction: it refers to the extent to which goods and services are preferred
by a consumer.
Assumptions:
- consumers are rational, their aim is to maximize utility.
- income/budget is limited.
Q Marginal
Total Utility
(Ice Cream) Utility
0 0
4
1 4
3
2 7
2
3 9
1
4 10
0
5 10
-1
6 9
Marginal: is the extra “something” resulting from one additional unit of “something
else”.
Marginal Utility: the extra satisfaction a consumer derives from consuming one
additional unit of the good.
∆𝑇𝑈 ∆𝑌
MU = = => MU is the slope of TU
∆𝑄 ∆𝑋
University of Balamand
Faculty of Business & Management
Survey of Economics
TU and MU
From Q=0 to Q=4
TU at a decreasing rate
MU + and
TU
12
10
0 Q
0 1 2 3 4 5 6 7
4
MU
3
0
0 1 2 3 4 5 6
-1 Q
-2
University of Balamand
Faculty of Business & Management
Survey of Economics
The last $ spent on (a) brings the same MU as the last $ spent on (b) …
Derivation of Demand:
A consumer is buying 2 goods: A and B
He is at his consumer equilibrium.
What happens if PA ?
𝑀𝑈𝑎 𝑀𝑈𝑏
Initially: =
𝑃𝑎 𝑃𝑏
𝑀𝑈𝑎 𝑀𝑈𝑏
PA => <
𝑃𝑎 𝑃𝑏
Paradox of Value:
Why is that water, which is essential to life, so cheap and diamonds, which are not
needed to survive, so expensive? (Adam Smith)