If people make choices on the basis of what’s going to bring them the most happiness, they need a way of comparing how much happiness each option brings.
Economists suppose that you can compare all possible things that you may experience with a common measure of happiness or satisfaction, which they call utility.
Two important measures are:
The overall satisfaction that is derived from the consumption of all units of a good over a given time period.
The additional utility is derived from the consumption of one more unit of a particular good.
When you look at these numbers, you notice that the extra utility each additional slice brings is decreasing:
Total utility increases by 8 utils, from 0 to 8 utils.
The increase is only 6 utils; total utility increases from 8 utils to 14 utils.
Total utility increases only 4 utils, from 14 to 18.
Total utility actually goes down, because slice number five can make even the most rabid pizza lover feel a little sick. This decrease in total utility implies that marginal utility must be negative for slice six.
The right column shows the diminishing marginal utility that comes with eating more and more slices of pizza because the marginal utility that comes with each additional slice is always less than that of the previous slice.
Specifically, although marginal utility is 8 utils for the first slice, it falls to 0 utils for slice five and then actually becomes negative for slices six because eating it makes just about anyone ill.
Individual people’s demand curve for any good will be the same as their marginal utility curve for that good, where utility is measured in money.
The marginal utility curve is negatively sloped.
It shows that as the consumer acquires larger quantities of pizza, its marginal utility diminishes. Consequently, at a diminishing price, the quantity demanded of pizza increases. There is clearly a relationship between the marginal utility curve and the consumer demand curve.
This is demonstrated in the figures below which shows the marginal utility curve for a particular person and pizzas eaten.
If the price of a pizza were $8, the person would consume 1 pizza, where MU = 8 utils.
If the price of a pizza fell to $6, consumption would rise to 2 pizzas, since this is where MU = 6 utils.
Thus as long as individuals seek to maximise consumer surplus and hence consume where the price = the marginal utility, their demand curve will be along the same line as their marginal utility curve