Utility theory examines the satisfaction or pleasure consumers receive from consuming goods and services. It is measured by how much consumers are willing to pay. There are two key concepts: marginal utility, which is the additional satisfaction from consuming an extra unit, and total utility, which is the total satisfaction from consuming a given quantity. Marginal utility decreases with additional consumption as the first units provide more satisfaction than later units.

1. UTILITY
MAXIMIZATION
Joy A. Macalla
BEED - III

2. The
economics
of
satisfaction

3. Utility theory
• Utility – refers to the satisfaction or
pleasure that an individual or
consumer gets from the consumption
of a good or service that (s)he
purchases.

4. Utility theory
• Utility is also measured by how much
a consumer is willing to pay for a
good service.

5. Two important
concepts:
• Marginal Utility
• Total Utility

6. MARGINAL UTILITY
• The additional satisfaction that an
individual derives from consuming an
extra unit of a good or service.
• ‘MARGINAL’ means ‘additional’ or
‘extra’.

7. MARGINAL UTILITY
• We use marginal analysis in the
examination of the effects of adding
an extra unit to, or taking away one
unit from, some economic variable.

8. MARGINAL UTILITY
• The marginal utility of a commodity
is the increase in total utility or
satisfaction derived from the
consumption or an additional or extra
unit of such commodity; it is the loss
of utility or satisfaction if one unit
less is consumed.

9. total UTILITY
• The total satisfaction that a customer
derives from the consumption of a
given quantity of a good or service in
a particular time period.

10. total UTILITY
• The total satisfaction that a customer
derives from the consumption of a
given quantity of a good or service in
a particular time period.