ECO101H1 Lecture Notes - Lecture 10: Marginal Utility, Utility, Indifference Curve
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ECO101H1 Full Course Notes
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The theory of consumer choice (used to derive the law of downward-sloping demand) Total utility = total satisfaction to person from consumption of product. Marginal utility = additional satisfaction (change in total utility) from consumption of one more unit of product. Principle of diminishing marginal utility: as a person consumes more of a good, the marginal utility of the good declines. Observations: tu increase with additional consumptions, mu decreases with additional consumption. Maximize total utility, given budget (income) constraint. Allocate income so that the marginal utility of the last unit of each good consumed, divided by its price, is the same for all consumed goods. Observations: straightforward to show using calculus (2nd year, motivate with example (1st year) Mu (good 1) / p (good 1) = mu (good 2) / p (good 2) = for all. Shows that if consumer is following this rule, it is not possible to obtain higher level of utility, given the consumer"s budget constraint.