ECO 2023 Microeconomics
Chapter 7: Consumer Behavior & Utility Maximization
Law of Diminishing Marginal Utility

Utility – the satisfaction or enjoyment that you receive from a choice or consumption of a good

Total utility – total amount of satisfaction or pleasure from consuming some specific quantity of a good

Marginal utility – the extra utility from consuming one more unit of the good
The law states : that as a consumer consumes more units of product, the marginal or additional utility that he or she will receive from the product declines

That if successive units of a good yield smaller and smaller amounts of marginal or extra utility then the consumer will buy additional units of a product only if the price decreases.
Created by: M. Mari
Fall 2007
Page 1 of 4
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ECO 2023 Microeconomics
Chapter 7: Consumer Behavior & Utility Maximization
Total
Utility
Utility increases as consumption increases until it reaches a maximum and begins to drop.
Units Consumed
The law of diminishing marginal utility explains why the demand curve for a given product slopes downward. If successive units of a good yield smaller and smaller amounts of marginal, or extra, utility, then the consumer will buy additional units of a product only if its price falls.
Theory of Consumer Behavior

The law of diminishing marginal utility explains how consumers allocate their money incomes among the many goods and services available for purchase.

Consumer Choice and Budget Constraint o A typical consumer’s situation has the following dimensions

Rational behavior

Preferences – clear cut preferences for certain of the goods and services that are available in the market
 Budget constraint – consumer has a fixed or limited amount of money income
Created by: M. Mari
Fall 2007
Page 2 of 4
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ECO 2023 Microeconomics
Chapter 7: Consumer Behavior & Utility Maximization
Created by: M. Mari
Fall 2007
Page 3 of 4

Prices o Different individuals will choose different mixes of goods and services that most satisfy him or her o Utility Maximizing Rule:

To maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yield the same amount of extra utility
 For example:
Product A: Price = $1
Product B: Price = $2
Units Marginal
Utility
(units)
MU/P Marginal
Utility
MU/P
1
2
3
4
5
10
8
7
6
5
10
8
7
6
5
24
20
18
16
12
12
10
9
8
6
6
7
4
3
4
3
6
4
Compare: maximize utility where”
MU
1
/P
1
= MU
2
/P
2
3
2
Product A = 2 units Product B = 4 units
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ECO 2023 Microeconomics
Chapter 7: Consumer Behavior & Utility Maximization
Income and Substitution Effects

Income Effect: is the impact that a change in the price of a product has on a consumer’s real income and consequently on the quantity demanded of the good
 Substitution Effect: is the impact that a change in a product’s price has on its relative expensiveness and consequently on the quantity of the good demanded.

The income and substitution effect combine to increase a consumer’s ability and willingness to buy more a specific good when price falls.
Created by: M. Mari
Fall 2007
Page 4 of 4
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