2.

1:Utility and Choice

In this secti on, we discuss the meaning of uti lity, disti nguish between total uti lity and
marginal uti lity, and examine the important diff erence between cardinal and ordinal
uti lity.

Theory of Choice

The interacti on of preferences and constraints that causes people to make the choices
they do.

Utility
The concept of uti lity is used here to introduce the consumer’s tastes. The analysis of
consumer tastes is a crucial step in determining how a consumer maximizes
sati sfacti on in spending income.

So, we can say utility remind us-

 The pleasure, satisfaction, or need fulfillment that people get from their economic activity.

 To identify all of the factors that affect utility would be virtually impossible

 Much economic analysis is based on the ceteris paribus assumption.

Ceteris Paribus Assumption

In economic analysis, holding all other factors constant so that only the factor being
studied is allowed to change.

Other factors are held constant so that we may choice is a simple setti ng that isolates
the economic factors that aff ect behavior.

Utility from Consuming Two Goods

 In this chapter we assume that a person receives utility from the consumption of two goods
“X” and “Y” which we can show in functional notation by

Utility  U ( X , Y ; other thin gs).

 The other things that appear after the semicolon are assumed to be held constant.

2.1.1:Total and Marginal Utility

Goods are desired because of their ability to sati sfy human wants. The property of a
good that enables it to sati sfy human wants is called uti lity. As individuals consume
more of a good per ti me period, their total uti lity (TU) or sati sfacti on increases, but
their marginal uti lity diminishes. Marginal uti lity (MU) is the extra uti lity received
from consuming one additi onal unit of the good per unit of ti me while holding
constant the quanti ty consumed of all other commoditi es.For example, Table 2.1
indicates that one hamburger per day (or, more generally, one unit of good X per
period of ti me) gives the consumer a total uti lity (TU) of 10 uti ls, where a uti l is an
arbitrary unit of uti lity. Total uti lity increases with each additi onal hamburger
consumed unti l the fi ft h one, which leaves total uti lity unchanged. This is the
saturati on point. Consuming the sixth hamburger then leads to a decline in total uti lity
because of storage or disposal problems.1 The third column of Table 3.1 gives the
extra or marginal uti lity resulti ng from the consumpti on of each additi onal hamburger.
Marginal uti lity is positi ve but declines unti l the fi ft h hamburger, for which it is zero,
and becomes negati ve for the sixth hamburger.

Table 2.1:Total and Marginal Utility

QX TU X MU X
0 0 ...
1 10 10
2 16 6
3 20 4
4 22 2
5 22 0
6 20 −2
FIGURE 2.1: Total and Marginal Utility In the top panel,
total utility (TU) increases by smaller and smaller amounts (the
shaded areas) and so the marginal utility (MU) in the bottom
panel declines. TU remains unchanged with the consumption of
the fifth hamburger, and so MU is zero. After the fifth hamburger
per day, TU declines and MU is negative.

2.1.2: Law of diminishing marginal utility.

Plotti ng the values given in Table 2.1, we obtain Figure 2.1, with the top panel
showing total uti lity and the bott om panel showing marginal uti lity. The total and
marginaluti lity curves are obtained by joining the midpoints of the bars measuring TU
and MU at each level of consumpti on. Note that the TU rises by smaller and smaller
amounts (the shaded areas) and so the MU declines. The consumer reaches saturati on
aft er consuming the fourth hamburger. Thus, TU remains unchanged with the
consumpti on of the fi ft h hamburger and MU is zero. Aft er the fi ft h hamburger, TU
declines and so MU is negati ve. The negati ve slope or downward-to-the-right
inclinati on of the MU curve refl ects the law of diminishing marginal uti lity.

Uti lity schedules refl ect tastes of a parti cular individual; that is, they are unique to the
individual and refl ect his or her own parti cular subjecti ve preferences and percepti ons.
Diff erent individuals may have diff erent tastes and diff erent uti lity schedules.Uti lity
schedules remain unchanged so long as the individual’s tastes remain the same.