The concept of diminishing marginal utility gives the reason why individuals

# The concept of diminishing marginal utility gives the

• 320
• 100% (1) 1 out of 1 people found this document helpful

This preview shows page 111 - 114 out of 320 pages.

The concept of diminishing marginal utility gives the reason why individuals have various goods in their carts. The earlier economists explained the negative gradient of demand curve based on the law of diminishing marginal utility, as what will be discussed in the following section. Law of diminishing marginal utility means that the marginal utility obtained from the consumption of additional units will start to decrease after a certain level of consumption when the amount consumed increases. Do you agree if it is said that satisfaction and consumption of a good will decrease after a certain level? Why? Explain. ACTIVITY 6.3 Copyright © Open University Malaysia (OUM)
TOPIC 6 CONSUMER BEHAVIOUR AND UTILITY MAXIMISATION 95 6.2.4 Consumer Equilibrium What is consumer equilibrium? As a rational consumer, you will maximise your satisfaction from consumption. However, through the definition of demand, we know that wants must be in balance with the ability to pay. Therefore, in maximising satisfaction, consumers are restricted by limited income and price of goods. ConsumersÊ objectives are achieved and consumers are said to have achieved consumer equilibrium when maximum utility can be attained with a certain sum of expenditure or income. (a) Consumption Equilibrium for One Good We will first look at consumption equilibrium of one good. If your income is limited, how can you maximise utility while utility is difficult to be measured? One way to gain maximum satisfaction from a limited income is by measuring util in monetary value. Hence, util is the value for consumption. Marginal utility becomes the sum of money willing to be paid to obtain one additional unit of good. If you are willing to pay RM1 for an additional cup of coffee, then the cup has MU = RM1. Here, when consumption only involves one type of good, consumer will maximise satisfaction when marginal utility from the consumption of the good is equivalent to price. Satisfaction is maximised when price is equivalent to marginal utility because marginal utility indicates the willingness to pay. Therefore, if marginal utility obtained from the consumption of an additional unit is Determine whether these statements are TRUE (T) or FALSE (F). 1. Theory of consumer behaviour assumes that the consumer will try to maximise marginal utility. 2. Law of diminishing marginal utility states that when consumption increases consistently, a level will be achieved where total utility will increase at an increasing rate. 3. When total utility increases, marginal utility is positive, and may increase or decrease. 4. Marginal utility is always greater than total utility. EXERCISE 6.1 Copyright © Open University Malaysia (OUM)
TOPIC 6 CONSUMER BEHAVIOUR AND UTILITY MAXIMISATION 96 much higher than the price that needs to be paid, consumers will still be able to increase satisfaction with additional purchases.