Utility - foundation in establishing the negative relationship between the demand and the price

satisfaction of an individual in his consumption

Assumptions (Cardinal Approach)

1. Consumption is based on the utility derived from the product of service. (one continues
to buy because of his satisfaction.
2. The utility is measured by monetary value. (if A costs 20.00 and B costs 2.00, A gives 10
times more satisfaction than B)
3. Buyers think rationally
4. Principle of Diminishing Marginal Utility- consumption increases; utility increases;
marginal utility decreases

Satiation- to provide more than enough (can cause discomfort to the consumer)
Marginal Utility- additional satisfaction a consumer gains
Total Utility- overall satisfaction from consuming

Assumptions (Ordinal Approach)- assumes utility from consumption can absolutely be

measured by its price
**Positive Inclination: satisfaction increases; consumption increases
**Negative inclination: marginal utility decreases; consumption increases
1. A consumer cannot measure the level of satisfaction (cannot say that A gives 10 times
more satisfaction than B) (instead, say: I prefer A more than B)
2. Consumers are rationalized (assumption of nonsatiation)
3. There is consistency (regularity in the consumption decision)
4. Diminishing Marginal Rate of Substitution- the amount of good you are willing to give up
to gain an additional unit of another good

Indifference Curve- locus of points that shows different combinations of consumption of

several commodities that will give the consumer the same level of satisfaction or utility.
- convex from the origin
- negative slope
Diminishing Marginal Rate of Substitution- the rate in which A is being replaced by B
Marginal Rate of Substitution (MRS)- the rate in which A is being substituted by B in
consumption to maintain the same level of utility for the individual
Budget Line or Budget Constraint- graph showing the various combinations of the amount of
commodities one can consume from his budget at the given prices
Consumer Equilibrium-