Utility (Copy)
7.1 Utility
7.1.1 Definition and Calculation of Total Utility and Marginal Utility
- Utility: Satisfaction or benefit gained from consuming goods/services.
- Total Utility (TU): Total satisfaction from consuming a certain quantity of a good.
- Marginal Utility (MU): Additional satisfaction from consuming one more unit of a good.
Formula:
MU = TU₂ − TU₁ - Relationship:
- TU rises while MU is positive.
- TU is at maximum when MU = 0.
- TU falls if MU becomes negative.
Example Table – TU & MU Relationship:
| Units Consumed | Total Utility (Utils) | Marginal Utility (Utils) |
|---|---|---|
| 1 | 20 | 20 |
| 2 | 35 | 15 |
| 3 | 45 | 10 |
| 4 | 50 | 5 |
| 5 | 50 | 0 |
| 6 | 45 | -5 |
7.1.2 Diminishing Marginal Utility
- Law: As more units of a good are consumed, MU from each additional unit decreases.
- TU curve increases at a decreasing rate until MU reaches zero.
- Explains downward slope of demand curve.
- Example:
- 1st coffee: MU = 12 utils
- 2nd coffee: MU = 8 utils
- 3rd coffee: MU = 4 utils
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Economics Full Scale Course
7.1.3 Equi-Marginal Principle
- Consumer maximises TU when MU per last unit of money spent is equal across all goods.
Formula:
MU₁ / P₁ = MU₂ / P₂ = … = MUₙ / Pₙ - If MU₁ / P₁ > MU₂ / P₂ → buy more of good 1, less of good 2 until equalised.
Example Table – Allocation of Income:
| Good | MU | Price | MU/P |
|---|---|---|---|
| Apple | 40 | 2 | 20 |
| Banana | 30 | 3 | 10 |
→ Buy more apples, fewer bananas to maximise satisfaction.
7.1.4 Derivation of an Individual Demand Curve
- Diminishing MU → lower willingness to pay for each extra unit.
- Conversion: MU in utils → money terms → price.
- Plot price against quantity → downward-sloping individual demand curve.
Step Table – From MU to Demand Curve:
| Quantity | MU (Utils) | Price Willing to Pay ($) |
|---|---|---|
| 1 | 20 | 20 |
| 2 | 15 | 15 |
| 3 | 10 | 10 |
| 4 | 5 | 5 |
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Economics Full Scale Course
7.1.5 Limitations of Marginal Utility Theory and its Assumptions of Rational Behaviour
Table – Key Limitations:
| Limitation | Explanation |
|---|---|
| Measurement difficulty | Utility is subjective, hard to quantify. |
| Constant MU of money assumption | Unrealistic – value of money changes with income. |
| Independent utilities | Ignores substitutes and complements. |
| Rational behaviour assumption | Real consumers may act irrationally. |
| Ignores other effects | E.g., income effect, substitution effect, behavioural biases. |