CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION

• Utility – want satisfying power of a commodity
• 3 characteristics of utility:

  utility and usefulness are not synonymous, subjective, cannot be quantified
• Total utility- total amount of satisfaction or pleasure a person

  derives from consuming some specific quantity
• Marginal utility- extra or additional satisfaction a consumer realizes from an additional unit of that product
• Formula for MU: change in total utility/change in the quantity consumed
• LAW OF DIMINISHING MARGINAL UTILITY - As one consumes more and more of the same commodity, total utility/satisfaction increases but at a decreasing rate
• The Law of Diminishing Marginal Utility can be illustrated by using the example of eating food. The first bite of food gives us the greatest level of satisfaction, while successive bites result in progressively lower levels of satisfaction until eventually, we stop eating altogether because there is no longer any benefit to doing so.