CHAPTER 7: THE THEORY OF DEMAND: THE UTILITY APPROACH
INTRODUCTION
In previous chapters we learned about the law of demand which states that the quantity demanded
of a good will increase if the price of the good decrease and vice versa, ceteris paribus.
In this chapter we investigate consumer behaviour in more detail.
7.1 UTILITY
The purpose of consumption is to satisfy wants.
Households want to maximise their satisfaction of wants = they want to maximise utility.
DEFINITION UTILITY:
The degree of satisfaction that a household or consumer derives from the consumption of a good or
service.
TYPES OF UTILITY:
Cardinal utility:
Utility you can measure / put a value to it. E.g. pizza = 40 utils and an oreo cookie = 20 utils.
Ordinal utility:
Utility of products ranked in order of preference. E.g. higher utility from pizza than oreo cookies.
LECTURE NOTES | ECON 112 CHAPTER 7
, 7.2 MARGINAL UTILITY (MU) and TOTAL UTILITY (TU)
Consider the example of John’s utility for bananas in TABLE 7-1.
TU
Q MU
Q TU MU
1 50 TU +MU =50
Marginal utility declines as more units 0 1
TU increases while MU > 0
are consumed during a given period
2 35 TU +MU = 50 + 35 = 85
1 2
3 29 85 + 29 = 114
4 132
5 144
6 6 150
7 2
8 0 TU at maximum when MU=0
9 -4 Disutility = if MU<0; TU decreases when MU < 0
DEFINITION MARGINAL UTILITY:
The ADDITIONAL utility gained from consuming ONE EXTRA UNIT of the product.
DEFINITION TOTAL UTILITY:
The sum of all marginal utilities.
Complete TABLE 7-1 without looking in the textbook. Check whether your answers correspond to the
textbook.
LAW OF DIMINISHING MARGINAL UTILITY / GOSSEN’S FIRST LAW:
The marginal utility of a good or service declines as more of it is consumed during a given period.
Watch the following video before you continue:
http://flippingeconomics.blogspot.com/p/the-theory-of-consumer-choice.html
LECTURE NOTES | ECON 112 CHAPTER 7
INTRODUCTION
In previous chapters we learned about the law of demand which states that the quantity demanded
of a good will increase if the price of the good decrease and vice versa, ceteris paribus.
In this chapter we investigate consumer behaviour in more detail.
7.1 UTILITY
The purpose of consumption is to satisfy wants.
Households want to maximise their satisfaction of wants = they want to maximise utility.
DEFINITION UTILITY:
The degree of satisfaction that a household or consumer derives from the consumption of a good or
service.
TYPES OF UTILITY:
Cardinal utility:
Utility you can measure / put a value to it. E.g. pizza = 40 utils and an oreo cookie = 20 utils.
Ordinal utility:
Utility of products ranked in order of preference. E.g. higher utility from pizza than oreo cookies.
LECTURE NOTES | ECON 112 CHAPTER 7
, 7.2 MARGINAL UTILITY (MU) and TOTAL UTILITY (TU)
Consider the example of John’s utility for bananas in TABLE 7-1.
TU
Q MU
Q TU MU
1 50 TU +MU =50
Marginal utility declines as more units 0 1
TU increases while MU > 0
are consumed during a given period
2 35 TU +MU = 50 + 35 = 85
1 2
3 29 85 + 29 = 114
4 132
5 144
6 6 150
7 2
8 0 TU at maximum when MU=0
9 -4 Disutility = if MU<0; TU decreases when MU < 0
DEFINITION MARGINAL UTILITY:
The ADDITIONAL utility gained from consuming ONE EXTRA UNIT of the product.
DEFINITION TOTAL UTILITY:
The sum of all marginal utilities.
Complete TABLE 7-1 without looking in the textbook. Check whether your answers correspond to the
textbook.
LAW OF DIMINISHING MARGINAL UTILITY / GOSSEN’S FIRST LAW:
The marginal utility of a good or service declines as more of it is consumed during a given period.
Watch the following video before you continue:
http://flippingeconomics.blogspot.com/p/the-theory-of-consumer-choice.html
LECTURE NOTES | ECON 112 CHAPTER 7
