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Indifference analysis is an altemative, graphical way of looking at how consumers make

choices and ...
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1. Define what economists mean by utility.

2. Distinguish between the concepts of total utility and marginal utility.
3. State the law of diminishing marginal utility and illustrate it graphically.
4. State, explain, and illustrate algebraically the utility-maximizing condition.

Why do you buy the goods and services you do? It must be because they provide you with
satisfaction—you feel better off because you have purchased them. Economists call this
satisfaction utility.

The concept of utility is an elusive one. A person who consumes a good such as peaches gains
utility from eating the peaches. But we cannot measure this utility the same way we can measure
a peach’s weight or calorie content. There is no scale we can use to determine the quantity of
utility a peach generates.

Francis Edgeworth, one of the most important contributors to the theory of consumer behavior,
imagined a device he called a hedonimeter (after hedonism, the pursuit of pleasure):

“[L]et there be granted to the science of pleasure what is granted to the science of energy; to
imagine an ideally perfect instrument, a psychophysical machine, continually registering the
height of pleasure experienced by an individual…. From moment to moment the hedonimeter
varies; the delicate index now flickering with the flutter of passions, now steadied by intellectual
activity, now sunk whole hours in the neighborhood of zero, or momentarily springing up
towards infinity.”[16]

Perhaps some day a hedonimeter will be invented. The utility it measures will not be a
characteristic of particular goods, but rather of each consumer’s reactions to those goods. The
utility of a peach exists not in the peach itself, but in the preferences of the individual consuming
the peach. One consumer may wax ecstatic about a peach; another may say it tastes OK.

When we speak of maximizing utility, then, we are speaking of the maximization of something
we cannot measure. We assume, however, that each consumer acts as if he or she can measure
utility and arranges consumption so that the utility gained is as high as possible.

Total Utility

If we could measure utility, total utilitytotal utilityThe number of units of utility that a consumer
gains from consuming a given quantity of a good, service, or activity during a particular time
period. would be the number of units of utility that a consumer gains from consuming a given
quantity of a good, service, or activity during a particular time period. The higher a consumer’s
total utility, the greater that consumer’s level of satisfaction.
Panel (a) of Figure 7.1, “Total Utility and Marginal Utility Curves” shows the total utility Henry
Higgins obtains from attending movies. In drawing his total utility curve, we are imagining that
he can measure his total utility. The total utility curve shows that when Mr. Higgins attends no
movies during a month, his total utility from attending movies is zero. As he increases the
number of movies he sees, his total utility rises. When he consumes 1 movie, he obtains 36 units
of utility. When he consumes 4 movies, his total utility is 101. He achieves the maximum level
of utility possible, 115, by seeing 6 movies per month. Seeing a seventh movie adds nothing to
his total utility.

Figure 7.1. Total Utility and Marginal Utility Curves