A2 Economics Note - Unit 7
7.1. Utility
7.1.1. Definition and calculation of total and margianl
utility
What is utility?
– Jeremy Bentham (1748-1832) saw utility as a function of usefulness, how useful or
enjoyable a product is determines how much satisfaction we get from a product.
– He thought utility could be readily calculated, in units he called ‘utils’ and thus, all
consumers could make rational decisions with their purchases that would maximise their
utility/ satisfaction.
– Rationality / Homo Economicus is when consumers and producers look to maximise their
utilty/satisfaction from the money they have.
+) Homo economicus (economic man):
● Homo economicus is a model for human behavior, characterised by an infinite capability to
make rational decisions.
● The model is generally used in economics and was first proposed by John Stuart Mill in an
1836 essay.
● Modern research has proved that the theory of an economic man is a flawed model.
Total utility
– Total Utility (TU) represents the cumulative satisfaction obtained from consuming a certain
quantity of goods or services.
– The total utility curve typically rises at a decreasing rate as more units are consumed,
reflecting the increasing but at a declining rate of satisfaction.
– Total utility = MU 1 + MU2 + MU3 + …
,Marginal utility
– Marginal Utility (MU) denotes the additional satisfaction obtained from consuming one
additional unit of a product or service.
– In some cases, consuming an additional unit may lead to a decrease in total utility, known
as negative marginal utility. This typically happens when over-consumption leads to
dissatisfaction.
,Graphs illustrating the relationship between marginal utility and total utility
7.1.2. Diminishing marginal utility
What is the law of diminishing marginal utility
– It states that: “As a consumer consumes more and more units of a specific commodity, the
utility from the successive units goes on diminishing”. (Hermann Heinrich Gossen, a
German economist, was first to explain this law in 1854)
, 7.1.3. Equi-marinal priciple
Equi-marginal Principle
– As we have limited incomes but lots of choices of what to spend it on, we will buy another
good/s that gives us more utility per unit price so that we maximise utility.
– This is called the ‘Equi-marginal principle’ and it sees consumers maximise their utility
where the marginal valuation is the same.
– As rational consumers , we will seek to maximise the utility obtainable from our limited
incomes. We thus switch expenditure to new products until we have secured the greatest
amount of satisfaction possible.
7.1. Utility
7.1.1. Definition and calculation of total and margianl
utility
What is utility?
– Jeremy Bentham (1748-1832) saw utility as a function of usefulness, how useful or
enjoyable a product is determines how much satisfaction we get from a product.
– He thought utility could be readily calculated, in units he called ‘utils’ and thus, all
consumers could make rational decisions with their purchases that would maximise their
utility/ satisfaction.
– Rationality / Homo Economicus is when consumers and producers look to maximise their
utilty/satisfaction from the money they have.
+) Homo economicus (economic man):
● Homo economicus is a model for human behavior, characterised by an infinite capability to
make rational decisions.
● The model is generally used in economics and was first proposed by John Stuart Mill in an
1836 essay.
● Modern research has proved that the theory of an economic man is a flawed model.
Total utility
– Total Utility (TU) represents the cumulative satisfaction obtained from consuming a certain
quantity of goods or services.
– The total utility curve typically rises at a decreasing rate as more units are consumed,
reflecting the increasing but at a declining rate of satisfaction.
– Total utility = MU 1 + MU2 + MU3 + …
,Marginal utility
– Marginal Utility (MU) denotes the additional satisfaction obtained from consuming one
additional unit of a product or service.
– In some cases, consuming an additional unit may lead to a decrease in total utility, known
as negative marginal utility. This typically happens when over-consumption leads to
dissatisfaction.
,Graphs illustrating the relationship between marginal utility and total utility
7.1.2. Diminishing marginal utility
What is the law of diminishing marginal utility
– It states that: “As a consumer consumes more and more units of a specific commodity, the
utility from the successive units goes on diminishing”. (Hermann Heinrich Gossen, a
German economist, was first to explain this law in 1854)
, 7.1.3. Equi-marinal priciple
Equi-marginal Principle
– As we have limited incomes but lots of choices of what to spend it on, we will buy another
good/s that gives us more utility per unit price so that we maximise utility.
– This is called the ‘Equi-marginal principle’ and it sees consumers maximise their utility
where the marginal valuation is the same.
– As rational consumers , we will seek to maximise the utility obtainable from our limited
incomes. We thus switch expenditure to new products until we have secured the greatest
amount of satisfaction possible.
