Consumer Behavior and Utility Analysis in Economics
Total Utility and Marginal Utility
Total utility (UT) is the satisfaction an individual derives from the consumption of a specific good.
Marginal utility (UMG) is the addition to total utility produced by consuming one additional unit of a good.
Relationship Between Total and Marginal Utility
If a consumer increases consumption by available doses of a good, their total utility (UT) grows at a decreasing rate. This occurs because the value obtained by the addition of a new unit (UMG) is smaller than the previous unit, reflecting the decreasing intensity of need satisfaction.
The Law of Diminishing Marginal Utility
There is a direct relationship between UT and the quantity (dose) consumed. However, this relationship breaks down when the quantity consumed satisfies the consumer's need, leading to a decrease in UT. This point is called the point of saturation. Beyond this point, consumers do not experience increased satisfaction; instead, increasing doses will decrease total utility.
Conversely, marginal utility (UMG) has an inverse relationship with the quantity (Q) consumed, and its curve is downward sloping due to the Law of Diminishing Marginal Utility.
Marginal Utility Theory and Demand
Marginal Utility Theory explains why the demand curve slopes downward. Given a good (Bn), the theory posits that a consumer is ready to purchase subsequent doses (packages) of that good, which provide diminishing utility, only if the price falls.
Consumer Preferences: Core Properties
The following properties define rational consumer preferences:
Completeness (Ranking)
Consumers must be able to order or rank consumption baskets. To compare any two baskets (A and B), the consumer must be able to indicate one of the following:
- They prefer basket A over basket B.
- They prefer basket B over basket A.
- They are indifferent between A and B.
This property eliminates the possibility that the consumer is unable to decide which of the two combinations is preferable.
Transitivity (Rationality)
Consumer preferences must be coherent or consistent. When comparing more than two consumption baskets, if the individual states that they prefer basket A over basket B, and basket B over basket C, then they must prefer basket A over basket C.
Insatiability
This indicates that a consumer will always prefer a consumption basket that contains at least one additional unit of some of the assets that comprise it. This removes the assumption of saturation or negative marginal utility in the standard preference model.
Continuity
It assumes that if an individual prefers basket A0 over basket B, they will always prefer a basket A1 (which is very similar to basket A0) over basket B.
Utility Function and Consumer Surplus
A utility function is a mathematical ratio that indicates the tastes of a particular individual.
Consumer surplus measures the difference between what the individual is willing to pay (the value of total utility) and the actual expenditure incurred by the individual.
Marginal Rate of Substitution (MRS)
The Marginal Rate of Substitution (MRS) is the slope of the indifference curve, representing the rate at which the consumer is willing to sacrifice units of one good to consume additional units of another good.
A key property of the MRS is that it is decreasing in absolute value as the consumer moves down along their indifference curve.