Utility Maximisation

With a single product, total utility is maximised when the marginal utility from the next unit consumed is zero (assuming that the budget of the consumer allows this point to be reached.) When multiple products are being chosen, the condition for maximising utility is that a consumer equalises the marginal utility per pound spent. The condition for maximising utility is: MUA/PA = MUB/PB where: MU is marginal utility and P is price.

Revision Video: Utility Maximisation

• A fall in the price of a product (other factors remaining the same) brings about an increase in the marginal utility per £1 spent
• In theory this will cause consumers to increase their demand as they switch out of substitute products
• All of this assumes of course that utility is measurable and that consumers are making rational, maximising choices

Revision Video: Concept of Diminishing Marginal Utility