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UTILITY AND
DEMAND CHAPTER
Preferences
A household’s preferences determine the benefits or
satisfaction a person receives consuming a good or
service.
The benefit or satisfaction from consuming a good or
service is called utility.
Total Utility
Total utility is the total benefit a person gets from the
consumption of goods. Generally, more consumption gives
more utility.
Marginal Utility
Marginal utility is the change in total utility that results
from a one-unit increase in the quantity of a good
consumed.
As the quantity consumed of a good increases, the
marginal utility from consuming it decreases.
We call this decrease in marginal utility as the quantity of
the good consumed increases the principle of diminishing
marginal utility.
A 0 10
B 1 8
C 2 6
D 3 4
E 4 2
F 5 0
A 0 10
B 1 50 8
C 2 38 6
D 3 33 4
E 4 29 2
F 5 25 0
A 0 10
B 1 50 8.33 8
C 2 38 6.33 6
D 3 33 5.50 4
E 4 29 4.83 2
F 5 25 4.17 0
A 0 10 15
B 1 50 8.33 8 17
C 2 38 6.33 6 19
D 3 33 5.50 4 28
E 4 29 4.83 2 42
F 5 25 4.17 0
A 0 10 15 5.00
B 1 50 8.33 8 17 5.67
C 2 38 6.33 6 19 6.33
D 3 33 5.50 4 28 9.33
E 4 29 4.83 2 42 14.00
F 5 25 4.17 0
A 0 10 15 5.00
B 1 50 8.33 8 17 5.67
C 2 38 6.33 6 19 6.33
D 3 33 5.50 4 28 9.33
E 4 29 4.83 2 42 14.00
F 5 25 4.17 0
A Rise in Income
When income increases, the demand for a normal good
increases.
Table 7.6 (in the textbook) illustrates this prediction
Table 7.7 (in the textbook) summarizes the assumptions
and predictions of marginal utility theory.
THE
END
© Pearson Education Canada, 2003