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Utility and Marginal Utility

Consumer behavior is key to economics. In economics, it is assumed that each consumer will make rational decisions when it comes to their consumption of goods and services. A rational decision is one that maximizes a consumer’s satisfaction (Utility) with the combination of goods and services he/she purchases.

However, a consumer cannot consume an infinite amount of goods and services; he/she can only consume what he/she can afford according to his/her income. In other words, the consumer’s demand for goods and services is constrained by his/her income.

As noted in the previous blog entry, prices of goods and services are, in part, determined by their scarcity. Knowing this, it makes sense for the consumer to purchase that combination of goods and services that have prices that allows them to maximize their total satisfaction (total utility).

For a consumer to truly maximize his/her total utility, a rational consumer must allocate his/her money such that the last dollar spent on each product yields the amount of extra utility. This concept is known as marginal utility. In other words, each additional unit of a good or service provides the exact same amount of utility as its previous unit.

What should you take away from this blog post? (1) rational consumer behavior involves maximizing ones utility given one’s income constraints; (2) marginal utility refers to the amount of satisfaction each additional unit of a good or service provides; and (3) as marginal utility increases so, too, does total utility and vice versa.