Lets start at the very basics by defining a few things. A phrase that will crop up a lot now is 'utility'. Basically, this is the term economists give to the satisfaction a consumer receives when consuming a good. Obviously, it's a totally theoretical thing as it's near on impossible to actually measure how happy or satisfied a consumer gets when consuming a good. But, for the benefit of the theory and the examples it is used. Total utility will then refer to the total satisfaction or happiness gained from all the units of the good that have been consumed. Another term here is marginal utility. This is the additional satisfaction from consuming one extra unit of a good. If i gained 10 utility from eating 6 bananas and 12 utility from eating 7 bananas then the marginal utility here would be 2 (12-10). Utility, like i said, is a very subjective thing, we have to make an assumption that it can be measured. The measurement of utility is a util. One util is one unit of satisfaction.
Marginal utility follows a diminishing pattern, the more of a good the consumer consumes the lower the marginal utility gets. This is because for every extra unit of a good consumed you won't be getting as happy until you finally reach a point at which total utility is at maximum and will only fall if any more of the good is consumed. Lets look at an example, here we have a table for the consumption of a good and the utility it gives the consumer:
- A change in consumption will affect the MU of both substitute and complimentary goods and also effect income left over to spend.
- Money itself doesn't have a constant MU.
- Income rising means extra money meaning each pound will bring less satisfaction.
- We cannot literally use money in an absolute sense to measure utility. ]