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I. Satisfaction received and limited budgets determine consumer demand.

II. Utility analysis
      A. Law of diminishing marginal utility
          1. Utility measures the want-satisfying power of a good or service.
          2. Marginal utility is the additional or incremental satisfaction (utility) a consumer receives from acquiring
              one additional unit of a product.
          3. Law of diminishing marginal utility: Consuming more of a product within a given period will at some
              point result in diminishing marginal utility. 
               a. Disutility results when total satisfaction decreases with the consumption of an additional unit. 
               b. A person can eat only so many hot dogs before they get sick. 
               c. A potato chip company had an ad that said "I bet you can't eat one." The idea was that utility 
                   went up and you had to eat more than one chip.
               d. A util is a fictitious measure of satisfaction. Two utils have twice the satisfaction of one util.

	Number Purchased	Total Utility	Marginal Utility
	0	0	0
	1	4	4
	2	7	3
	3	8	1
	4	8	0
	5	7	-1

      B. Utility maximizing rule
          1. When spending a limited amount of money, consumers try to equate the marginal utility per dollar for the items 
              being purchased.

  

        2. Given a budget of $15.00, use utility maximizing theory to calculate how many of the following three products would
            be purchased assuming utility is to be maximized and all the money is to be spent.

X costs $3				Y costs $2				Z costs $1
Quantity	MUQ	MU/$	Buy	Quantity	MUQ	MU/$	Buy	Quantity	MUQ	MU/$	Buy
1	12	4.0	1st	1	6	3.0	3rd	1	3	3.0	3rd
2	10	3.3	2nd	2	4	2.0	4th	2	2	2.0	4th
3	6	2.0	4th	3	1	0.5		3	1	1.0
4	0	0.0		4	0	0.0		4	0	0.0

     C. Utility affects the law of demand. 
          1. Because utility diminishes, consumers will not purchase more of a good unless price is lowered (law of demand).
          2. The law of diminishing marginal utility causes a demand curve to have a negative slope.
     D. Consumer surplus
          1. All goods are purchased at an equilibrium price. 
          2. Because consumers would have paid more for smaller quantities purchased, they are said to receive a surplus. 

III. Indifference analysis
      A. Indifference curves
          1. Consumers determine the different combinations of two goods which give them the same total satisfaction.
          2. Total utility is constant for each combination of goods.
          3. Because of diminishing marginal utility, the curve is bowed toward origin.
              a. Assume you are equally satisfied with 4 movies and 4 bowling nights per month.
              b. If you give up one of either good, diminishing utility requires you gain more (say 2) of the additional 
                  good being received.
         4. Marginal rate of substitution (MRS) is the trade-off ratio between the two goods.

     5. Principle of diminishing marginal rate of substitution
            a. Because of diminishing marginal utility, less and less of a good must be given up to gain an additional unit
               of some other good. 
            b. Therefore, the marginal rate of substitution decreases, i.e., the value of an additional unit of good X diminishes
                in terms of good Y.
       6. An indifference map is a number of indifference curves each representing a different level of total utility.
  B. Budget lines
      1. Depict the combination of two goods that are attainable with a given amount of disposable income (DI) or budget amount.

      2. As the budget (DI) increases, the budget line moves right.
      3. If the price of one good (x) decreases, that side of the budget line slides away from origin.
 C. Maximum satisfaction is attained with a budget line that is tangent to the highest indifference curve.

D. Indifference analysis explains why a demand line has a negative slope.
     1. As the price of x drops, the budget line slides to the right on the x-axis.
     2. Maximum satisfaction requires buying more of product X.

This indifference map moves to the right for a normal good as more is purchased with more income.	Here, the indifference map back for an inferior good as less is purchased with more income.

      F. Maximizing Behavior from Cyber Economics has a more in depth analysis
      G. Our Economics Learning Center is for students, teachers, and professionals.