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Utility is the satisfaction derived by a consumer when consuming a good or service. Marginal utility is the additional utility received by consumers for consuming additional goods. Total utility is the total satisfaction derived from the consumption of a given quantity of a good or service.

The law of marginal diminishing utility states that although the total utility derived from a good increases with the amount consumed, it does so at a decreasing rate. Therefore, marginal utility falls.

The following table shows the utility obtained when consuming different quantities of good X. Assuming that 1 util of good X is worth $0.05.

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Law of equi-marginal principle is when a consumer will get maximum satisfaction from spending his income if he allocates his expenditure so that for all goods the ratio marginal utility to the price of the good is the same.

The formula is MUa/Pa = MUb/Pb = MUc/Pc. MU refers to the last unit of the good, P is the price of the good.

For example, assuming MU of tea is 10, with the price of $5. Whereas MU of coffee is 20 with the price of $10. Using the formula, MUtea/ Ptea = MUcoffee/Pcoffee

10/5 = 20/10

2=2

For every dollar spent on tea, consumers get 2 utils of satisfaction. Meanwhile for every dollar spent on coffee, consumers get 2 utils of satisfaction.

However, when the price of coffee decreases to $5, MU does not equal to P.

10/5 = 20/5

2≠4

For every dollar spent on tea, consumers get 2 utils of satisfaction. Whereas for every dollar spent on coffee, consumers get 4 utils of satisfaction.

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This diagram demonstrates how to derive the demand curve. Consumers will demand more tea due to the fall in price, which follows the law of demand i.e. when the price falls, quantity demanded rises. When consumers buy more coffee, its marginal utility will fall and since they buy less of tea, its marginal utility will increase until it reaches the equilibrium.

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For Inferior goods, as prices falls it will show an overall increase in the demand for the good following the law of demand. This is shown as an increase in the substitution effect as it is much more cheaper relative to other goods (Q1 to Q2) is greater than the decrease in the income effect so people buy kess of it despite the increasing in purchasing power (Q2 to Q3). The diagram above shows the overall increase in demand as the prices of the good fall from consumption point from 1 to 3.

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From the marginal utility theory, the theory can only indicate that as prices of the good fall, the quantity demanded will then rise. However, the theory is unable to identify whether the good is a normal or inferior good as a fall in price will tend to increase the quantity demand of those goods.

This can only be possible under the theory of indifference curve. As the normal goods of prices fall, both substitution and income effect shows an increase in demand for the good. As shown in the diagram above, as the budget line pivots outwards from B1 to B2 leading to a consumption point moving from Q1 to Q3. Diagram shows that Substitution Effect (Q1 to Q2) because price of the good is relatively more cheaper when price falls and Income Effect increases as purchasing power of the good meaning more of the good is bought (Q2 to Q3) increasing the consumption of a good as prices fall shown from points 1 to 3.

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If the good is $0.75, consumers can only consume 1 unit of good X. If the good is $0.50, consumers can consume 3 units of the good. If there is a price, consumers will continue to consume until marginal utility is equal to the price, MU=P.

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However in marginal utility theory, we must assume that consumers are rational, consumers seek to maximise total utility and that consumers have limited income.

This is unrealistic as in reality, consumers don't consume all at once, that is the measurement of utility is based on the assumption that goods are consumed consecutively.

Whereas consumers don't consume one good after another. For instance, an individual may consume the first glass of coke today and the second glass of coke will be consumed another day. Hence, it gives a different satisfaction level.

Furthermore, consumers are not rational all the time, this theory assumes that consumers are rational.

Next, consumers taste and preferences are not fixed. They can always be subject to change with the use of advertisement.This theory assumes that tastes are fixed which is clearly not the case.

Finally, is that in the case of rare collection. For example, there are only 2 diamonds in the world, owning both of them will increase the satisfaction of owning them.