4.1.2.1 Consumer Behaviour - Utility Theory (AQA)

This brief study note covers utility theory for AQA Economics.

Study Notes on Utility Theory and Maximization

Utility Theory: Total and Marginal Utility

• Utility refers to the satisfaction or pleasure that individuals derive from consuming goods and services.
• Total Utility (TU) is the overall satisfaction obtained from consuming a certain quantity of a good or service.
• Marginal Utility (MU) is the additional satisfaction gained from consuming one more unit of a good or service.

Hypothesis of Diminishing Marginal Utility

• The Hypothesis of Diminishing Marginal Utility states that as a person consumes more units of a good or service, the additional satisfaction (marginal utility) from each additional unit decreases.
• This principle explains why individuals usually do not consume infinite quantities of a good, as the marginal utility diminishes.

Utility Maximization

• Utility maximization is the economic concept that rational individuals seek to allocate their resources (money or time) in a way that maximizes their total utility.
• To achieve utility maximization, consumers compare the marginal utility of the last unit consumed to its price (or opportunity cost).

Key Takeaways:

• Total utility increases as consumption of a good or service rises, but at a diminishing rate.
• Marginal utility decreases as more units are consumed due to the Hypothesis of Diminishing Marginal Utility.
• Utility maximization occurs when individuals allocate resources to goods or services in a way that maximizes their total utility, given budget constraints.

Multiple Choice Questions:

Question 1: What does Total Utility (TU) represent in utility theory?

• A) The additional satisfaction from consuming one more unit.
• B) The overall satisfaction from consuming a certain quantity of a good.
• C) The price of a good.
• D) The satisfaction from the first unit of consumption.

Question 2: According to the Hypothesis of Diminishing Marginal Utility, what happens to marginal utility as consumption of a good increases?

• A) Marginal utility increases.
• B) Marginal utility remains constant.
• C) Marginal utility decreases.
• D) Marginal utility becomes negative.

Question 3: Utility maximization occurs when:

• A) Consumers aim to minimize their total utility.
• B) Consumers allocate resources to goods to maximize their total utility.
• C) Consumers ignore their budget constraints.
• D) Consumers aim to maximize marginal utility.

Question 4: What concept explains why individuals usually do not consume infinite quantities of a good?

• A) The Law of Demand
• B) The Law of Supply
• C) The Hypothesis of Diminishing Marginal Utility
• D) The Law of Diminishing Returns

Question 5: If a consumer decides to buy more of a good until the marginal utility equals the price of the good, what economic principle are they following?

• A) The Law of Demand
• B) The Law of Supply
• C) Utility maximization
• D) The Law of Diminishing Returns

Question 6: Which of the following best defines Marginal Utility (MU)?

• A) The overall satisfaction from consuming a certain quantity of a good.
• B) The additional satisfaction from consuming one more unit of a good.
• C) The price of a good.
• D) The satisfaction from the first unit of consumption.

Answers:

1. B) The overall satisfaction from consuming a certain quantity of a good.
2. C) Marginal utility decreases.
3. B) Consumers allocate resources to goods to maximize their total utility.
4. C) The Hypothesis of Diminishing Marginal Utility
5. C) Utility maximization
6. B) The additional satisfaction from consuming one more unit of a good.