Microeconomics chater 7 highlights PDF

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Utility refers to satisfaction or happiness a consumer receives from purchasing a product. The law of diminishing marginal utility refers that added satisfaction declines as a consumer acquires additional units of a given product. Total utility measures total amount of satisfaction or pleasure a person derives from consuming some specific quantity of a good or service. Marginal utility is the extra satisfaction a consumer realizes from an additional unit of that product. Thus, marginal utility simply refers to change in total utility. See Figure 7.1 on page 141. Marginal utility is equal to zero when total utility is at a maximum. The utility-maximizing rule indicates that a consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility. In other words, a consumer will maximize utility when each good is purchased in amounts such that the marginal utility per dollar spent is the same for all goods. During the process, in deciding what to buy, the consumer will choose the good with the highest marginal utility-to-price ratio. The algebraic generalization is MUa/Pa = MUb/Pb For application, see Table 7.1 and Table 7.2 on pages 142 & 143. Suppose, MUa/Pa > MUb/Pb then the consumer should purchase more of A and less of B. As dollars are reallocated from B to A, the marginal utility per dollar of B will increase while the marginal utility per dollar of A will decrease.

Consider the opposite case and see page 144 on our textbook. If the price of a good increases (decreases), the substitution effect will always tend to make the quantity decrease (increase), while the income effect could go either way. See page 145 on our textbook. The downward sloping demand curve is explained by the income effect, substitution effect, and diminishing marginal utility. The demand curve for a product is downwardly sloping b/c marginal utility diminishes as more of a product is consumed....