Chapter 2

Consumer Choice
Theory
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Learning Objectives
1. Utility, Total Utility and Marginal Utility.
2. Maximizing Total Utility
3. Maximizing Total Utility consumer
equilibrium

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1. Utility, Total Utility and Marginal Utility

Utility - The satisfaction, or pleasure,

that people receive from consuming a
good or service.
Util - A hypothetical unit used to
measure how much utility a person
obtains from consuming a good.

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Utility (satisfaction) is typically measured

in dollars according to the willingness to
pay principle.
What is the most that you are willing to
pay for that product?

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 Total utility The total satisfaction a

person receives from consuming a
particular quantity of a good.
Marginal utility The additional
utility a person receives from
consuming an additional unit of a
particular product. (MU= TU/ Q)
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Example 1
Units of apple

Total utility (TU)

50 utils

80 utils

What is the marginal utility of the

second apple?
Or what is the additional utility of
consuming an additional apple?
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The Law of Diminishing Marginal Utility

The

principle that the extra

satisfaction of a good or service
declines as people consume
more in a given period.
The more of a specific product
consumer obtains, the less they
will desire more units of that
product.
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Illustration
Units of hamburger

Total Utility (TU)

20

35

47

56

61

61

59

Marginal Utility (MU)

18

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2. Maximizing Total Utility

When the
marginal

utility per dollar

of each good is equal
and the entire budget is
spent
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Example 2:

(Big Macs and Milkshakes = $2 each)

BIG MACS
Quantity

MU MU/P

MILKSHAKES
MU

MU/P

1/2

1/2

0
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Example 2
marginal

utility per dollar of

each good is equal
Possible Combinations:
i.
ii.
entire budget is spent ($8)

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3. Maximizing Total Utility consumer

equilibrium

Consumer equilibrium = a condition

in which total utility cannot increase
by spending more of a given budget
on one good and spending less on
another good.

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Consumer Equilibrium

MU A
price A

MU B
price B

MU Z
= price Z

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Example 3: (Price of Big Mac = $2)

MU of Big Mac
price of Big
Mac

4 utils
$2

MU of milkshake
=
price of
milkshake

4 utils
$2
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Example 3a
What

happens if the price of a Big Mac falls

to $1 and upsets the previous equilibrium?

MU of Big Mac
price of Big Mac

MU of milkshake
> price of milkshake

4 utils
4 utils
>
$1
$2
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Consumer does not achieve consumer
equilibrium.
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Example 3b
What should the consumer do in
order to restore maximum total
utility?
To restore maximum total utility, the
consumer spends more on Big
Macs, spends less on milkshake.

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Exercise 4
Quantity

Product A: Price RM2

MU

MU/RM

Product B: Price RM4

MU

10

24

20

18

16

12

MU/RM

What are the possible combinations of Product A and B?

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Summary
1. Utility is the satisfaction or pleasure derived from
consumption of a good or service. Actual
measurement is impossible, but economists
assume it can be measures by a fictitious unit
called the util.
2. Total utility is the total level of satisfaction derived
from all units of a good or service consumed.
3. Marginal utility is the change in total utility from a
1-unit change in the quantity of a good or service
consumed.
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Summary
4. The law of diminishing marginal utility states
that the marginal utility of a good or service
eventually declines as consumption increases.
5. Relationship between Marginal and Total Utility
When TU increases, MU decreases but remain as
positive
When TU at maximum, MU equals zero
When TU decreases, MU continue decreases but
become negative

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Summary
6. Consumer equilibrium is the condition of
reaching the maximum level of satisfaction, given a
budget, when the marginal utility per dollar spent on
each good purchased is equal.

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