The theory of Diminishing marginal utility 28th may

2024

Consumers who seek to prolong their limited incomes, and maximise the benefits received
from purchasing a good.

Rational choice theory :

- People have perfect information
- Act in their own self-interest
- They attempt to maximise utility
- That people make independent choices
- Consumer preferences do not fluctuate/they are consistent with demand
- Measured in utils(price consumer is willing to pay for the good), showcases the
satisfaction benefitted form the consumer.
Critiques of rational choice theory:
- Consumers decisions are likely to be affected by social factors, not making
independent choices
- They are not likely to have consistent preferences
- People may not have perfect information, leading to sub -optimal decisions (not
maximising utility) Bounded rationality-you may believe the most perfect deal, but
this if often not the case, as consumers are not aware of every deal.

Mu(marginal utility) formula, total utility-the total utility at the previous quantity.
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When Mu is negative, total utility will decline

When mu is 0, then total utility is at its highest
The relationship between DMU and TU that, Total utility y is rising at a diminishing rate.

Equi marginal principal

Consumers will continue spending, where a rational consumer will distribute income between
goods, till marginal utility, unitality will be equal till the last dollar

Utility is the satisfaction derived from consumption of a good, measured it utils.

Diminishing marginal utility theory
Every additional unit consumed has reduction in satisfaction given,

Assumption of Diminishing marginal utility:

Various units of the goods are homogenous) no difference in quality or satisfaction given for
each good consumed)
There is no time gap between consumption of the different units
Consumer is rational
Taste, preferences, quality of good stays unchanged.
Utility of money remains unchanged

Exceptions of this theory are Veblen goods, where demand increases with price, and periods
of speculative buying, eg: houses and other in the 2008 housing crisis) Speculative buying is
when assets are only purchased due to an anticipation for an increase in price, usually without
any proper research done, thus demand increases with price.

When answering an exam question…

Discuss
Assumptions, limitations and expectations.

Maximising Marginal utility

If Marginal utility of x/price of x > marginal utility of y/price of y… THEN buy more of
good x to maximise utility
If Marginal utility of x/price of x < marginal utility of y/price of y… THEN buy more of
good y to maximise utility