Utility is a conceptual measure of satisfaction; it is not actually measurable The theory of utility maximization allows us to ask how a utilitymaximizing consumer would respond to a particular event By following the marginal decision rule, consumers will achieve the utilitymaximizing condition: Expenditures equal consumers’ budgets, and ratios of marginal utility to price are equal for all pairs of goods and services Thus, consumption is arranged so that the extra utility per dollar spent is equal for all goods and services The marginal utility from a particular good or service eventually diminishes as consumers consume more of it during a period of time Utility maximization underlies consumer demand The amount by which the quantity demanded changes in response to a change in price consists of a substitution effect and an income effect The substitution effect always changes quantity demanded in a manner consistent with the law of demand The income effect of a price change reinforces the substitution effect in the case of normal goods, but it affects consumption in an opposite direction in the case of inferior goods An alternative approach to utility maximization uses indifference curves This approach does not rely on the concept of marginal utility, and it gives us a graphical representation of the utility-maximizing condition CONCEPT PROBLEMS Suppose you really, really like ice cream You adore ice cream Does the law of diminishing marginal utility apply to your ice cream consumption? Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 403