Zarginal Utility 1

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If consumers are rational every consumer will try to maximize the satisfaction they will gain from

the goods. For simplicity, let's assume that there are only two goods in the market for consumers.

And the income that consumers have is not unlimited so the consumers are subject to a budget con-

straint.

In the decision-making process the concept of marginal utility steps in. Marginal utility is the

amount of extra satisfaction that consumer gains from having an additional unit of goods and ser-

vices. For example, let's assume that the good we are discussing is a slice of pizza. The marginal

utility will be at the highest point when having the 1st slice of pizza because the consumer is hungry

or maybe craving that pizza for a long time. With every additional slice of pizza, consumers will

experience a decrease in the marginal utility of the slice of pizza. It will even come to a point that

the satisfaction level will be negative. So if we put the marginal utility on the y-axis and total quan-

tity on the x-axis we will observe a negative sloping line. This phenomenon is called the diminish-

ing marginal utility.

In the optimum allocation, consumers will choose to equalize the marginal utility per dollar for each

good. Because it is the point where the maximum available satisfaction is reached. Thus, for a ra-

tional consumer, the optimum allocation of two goods with a given income is (Marginal Utility of

Good A)/Price of Good A = (Marginal Utility of Good B)/Price of Good B.

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If consumers are rational every consumer will try to maximize the satisfaction they will gain from the goods. For simplicity, let's assume that there are only two goods in the market for consumers. And the income that consumers have is not unlimited so the consumers are subject to a budget constrain ...
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