UTILITY THEORY
this...or...that??
Utility theory is an economic framework for understanding how individuals make decisions to maximize their satisfaction, or “utility”.
TOTAL UTILITY
ON THE MENU THIS WEEK
MARGINAL UTILITY
I’m tired of burgers and pizza.
Marginal utility is the extra satisfaction gained from consuming one more unit of a good or service.
Marginal utility decreases as more of a good is consumed over a given time period.
ON THE MENU THIS WEEK
TOTAL UTILITY
A utility function is an algebraic expression that allows us to rank a consumption bundle by the total utility or satisfaction it provides.
Total Utility =
hamburgers
hamburgers
Consumption Bundles
Consumption bundles refer to particular combinations of goods being considered.
Ranking Total Utility
Rank A and C over B Indifferent between A and C
The notion of a utility function may seem mysterious. In fact, it is hard to imagine a consumer thinking in terms of a specific utility function when purchasing goods
and services. Yet, the concept of satisfaction that the
utility function expresses is the foundation of consumer economic analysis.
MARGINAL UTILITY
Marginal utility is the change in utility derived from an increase in consumption of a particular good. This value will fall (rise) as consumption increases (decreases).
= total utility
MU
hamburgers
total hamburgers
The Law of Diminishing Marginal Utility
The law of diminishing marginal utility suggests that as consumption per unit of time increases, marginal utility decreases. Think about how you consume your favorite beverage. The first beverage provides a certain level of satisfaction in quenching your thirst. But additional beverages provide less satisfaction than
previously. In fact, after a certain point, additional consumption of your favorite beverage likely will result in dissatisfaction! Often, the law of diminishing marginal utility
is evident during tailgating on weekends at college or professional football games.
TOTAL UTILITY
AMY SCHNEIDER
Created on October 30, 2025
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Transcript
UTILITY THEORY
this...or...that??
Utility theory is an economic framework for understanding how individuals make decisions to maximize their satisfaction, or “utility”.
TOTAL UTILITY
ON THE MENU THIS WEEK
MARGINAL UTILITY
I’m tired of burgers and pizza.
Marginal utility is the extra satisfaction gained from consuming one more unit of a good or service.
Marginal utility decreases as more of a good is consumed over a given time period.
ON THE MENU THIS WEEK
TOTAL UTILITY
A utility function is an algebraic expression that allows us to rank a consumption bundle by the total utility or satisfaction it provides.
Total Utility =
hamburgers
hamburgers
Consumption Bundles
Consumption bundles refer to particular combinations of goods being considered.
Ranking Total Utility
Rank A and C over B Indifferent between A and C
The notion of a utility function may seem mysterious. In fact, it is hard to imagine a consumer thinking in terms of a specific utility function when purchasing goods and services. Yet, the concept of satisfaction that the utility function expresses is the foundation of consumer economic analysis.
MARGINAL UTILITY
Marginal utility is the change in utility derived from an increase in consumption of a particular good. This value will fall (rise) as consumption increases (decreases).
= total utility
MU
hamburgers
total hamburgers
The Law of Diminishing Marginal Utility
The law of diminishing marginal utility suggests that as consumption per unit of time increases, marginal utility decreases. Think about how you consume your favorite beverage. The first beverage provides a certain level of satisfaction in quenching your thirst. But additional beverages provide less satisfaction than previously. In fact, after a certain point, additional consumption of your favorite beverage likely will result in dissatisfaction! Often, the law of diminishing marginal utility is evident during tailgating on weekends at college or professional football games.