ARTSSCI 2E03 Chapter Notes - Chapter 3.1: Marginal Utility, Economic Surplus, Decision Rule
30 Sep 2017
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Chapter 3. 1 law of diminishing marginal utility. The law or assumption that additional units of commodity are worth less and less to a consumer: ex. Terms: law = assumption, marginal = additional/incremental, utility = satisfaction, measure the satisfaction derived from a good in willingness to part with income. The increase in utility that results from increasing consumption by one additional unit. The decision rule which states that the purchase of any commodity should be expanded until its marginal utility (measured in terms of willingness to part with income) has been pushed down to its price. If expenditure on a is a small proportion of total income, then we can approximate by interpreting b as income itself: equation simplifies to: Mua = pa: figure 3. 4 - the optimal purchase rule and consumer surplus, to maximize utility, the consumer should arrange their purchases so that the additional utility per dollar spent is the same for all commodities.
