Utility and Consumer Preferences

Lesson 3.1: Utility and Consumer Preferences

What Is Utility?

Utility is the satisfaction or benefit a consumer gains from consuming a good or service. It’s not measured in dollars — it's measured in utils (a hypothetical unit).

There are two types of utility:

• Total Utility: The overall satisfaction from consuming multiple units.
• Marginal Utility: The additional satisfaction from consuming one more unit.

The Law of Diminishing Marginal Utility

This principle states that as a person consumes more of a good, the marginal utility from each additional unit decreases.

Example: The first slice of pizza hits hard. The fifth? Meh.

Consumer Preferences

Consumers make decisions based on their preferences, which are:

• Complete: Consumers can rank all options.
• Transitive: If A > B and B > C, then A > C.
• Non-satiated: More is preferred to less (usually).

We often represent preferences using indifference curves — graphs that show combinations of two goods that provide the same utility.

Key Takeaways

• Utility helps explain consumer behavior.
• Marginal utility is what drives choices.
• Preferences can be represented graphically and logically.