Marginal Analysis and Demand

Marginal Analysis and Demand

• Utility: 
  the benefit of satisfaction gained from consumption.
  In utils (not an actual measurement)
• Total utility:
  Adding up the total amount of satisfaction/benefit gained from consuming a quantity of units.
• Marginal utility:
  the extra benefit/satisfaction gained from consumption

The marginal utility of the second unit is the change in TU
MU=TU2-TU1

• The total utility and marginal utility
  (more you consume the more your satisfaction increases)

The MU curve is downward sloping reflects an important rule

• The Law of diminishing marginal utility
  the extra benefit /satisfaction gained from consuming one more unit of a good decreases as consumption increases.
• Optimum purchase rule
  States that a consumer that wishes to maximize total satisfaction should purchase more goods until price equals marginal utility (P=MU)
  If the p>MU the consumer will not buy as it is too expensive. Reduced consumption will increase MU until P=MU
  If P
• Reasons for the downward slope of the demand curve
  the demand curve is derived from the marginal utility curve and the optimum purchase rule(P=MU)
  Because consumers gain less satisfaction from each extra unit of consumption it is reasonable to suggest that they are only willing to buy another unit if the price decreases to match their decreasing MU
  The price must fall in order for the consumer in order for the consumer to demand more of The product to match the fall in their marginal utility
  The consumer arranges their spending to ensure that P=MU as the price increases we buy less to increase the MU