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WEEK 2

ELEMENTARY TREATMENT OF UTILITY THEORY

Content

1. Concept of Utility Theory
2. The Law Diminishing Marginal Utility
3. Utility maximization and Derivation of Demand Curve from the utility Theory

Sub-topic One:  Concept of Utility Theory

Preview

Utility theory is based on the fact that satisfaction which consumers derived from consumption of goods and services can be measure quantitative.

Meaning of Utility

Utility is the amount of satisfaction that a consumer derives from the consumption of goods and services at a particular time.

Since we have assumed that utility can be measured, we should be able to determine such facts: what is the Total Utility a consumer derives from the consumption of a commodity; or what are the marginal utilities derived from consuming several units of a commodity.  As we said earlier, this is premised on the assumption that consumption can be measured. Let’s examine these in detail

Total Utility:

This is the total amount of satisfaction a consumer derives from the consumption of several quantities of a commodity.  For, if a consumer consumes an egg per every two days, then the total of number of eggs consumed in a month will be 15.  This is expressed in the function below:

TUx  = f(q)  meaning that Total Utility is a function of quantity

Average Utility

This refers to the total utility divided by the amount of the goods consumed.  This can be expressed as

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