Chapter 30: Utility¶

Core Definitions¶

Utility — a measure of the satisfaction or happiness a consumer receives from consuming a good or service. In economics, utility means satisfaction, not necessarily practical usefulness.
Util — a notional unit used to express utility when utility is treated as measurable.
Total utility (TU) — the total satisfaction received from consuming all units of a good or service.
Marginal utility (MU) — the additional utility received from consuming one more unit of a good or service.

MU = change in TU / change in quantity consumed

Law of diminishing marginal utility — as consumption of a good increases, the marginal utility from each successive unit tends to decrease, other things being equal.
Cardinal utility — an approach that assumes utility can be measured numerically and expressed in utils.
Ordinal utility — an approach in which consumers rank alternatives by preference but do not assign exact numerical values to utility.
Rational consumer — a consumer who ranks alternatives consistently and allocates limited income to maximize total utility.
Ceteris paribus — all other relevant factors are held constant.

Equi-marginal principle — a consumer maximizes total utility when the utility gained from the last unit of money spent is equal for every good purchased, so no reallocation of spending can increase total utility.

MUx / Px = MUy / Py = ...

Marginal utility of money / utility per unit of money — the utility gained from the last unit of money spent; for a particular good, MU / P measures utility per unit of money.
Consumer equilibrium — the situation in which a consumer has maximized total utility given income and prices, with no possible reallocation of expenditure able to increase utility.
Individual demand curve under marginal utility theory — the consumer’s marginal utility curve, because each successive unit usually gives less utility and the consumer is willing to pay less for it. The consumer buys up to the point where P = MU.

Behavioural economics — the study of economic decisions that includes psychological influences, biases, habits, emotions, advertising, and social pressure rather than assuming that consumers are always fully rational.
Decoy effect — a cognitive bias in which adding an inferior “decoy” option changes the consumer’s choice between the original options.

TU vs MU: TU is the total satisfaction from all units; MU is the extra satisfaction from one additional unit.
Diminishing MU does not initially mean falling TU: TU rises while MU remains positive. TU is maximized when MU is zero, and TU falls when MU becomes negative.
Cardinal vs ordinal: cardinal utility uses numerical values; ordinal utility only ranks preferences.
Equi-marginal principle vs consumer equilibrium: the principle is the condition for maximising utility; equilibrium is the resulting position in which spending does not need to change.