Consumer choice is fundamental to market economies, and consumers make all kinds of decisions - they choose to drink coffee or tea (or neither), to go to movies, to eat at a restaurant, to buy excellent (or not so good) hi-fi systems. Economists assume that in making choices, consumers are motivated to maximise their utility - that is the total satisfaction that they receive from the goods and services that they consume. Neither economists nor psychologists can measure utility directly, but our inability to measure something does mean that is not real. People gain satisfaction from eating a good meal, listening to a good CD, or taking a walk in the evenings. Even though we cannot measure the utility you obtain from these actions, we need some way to think about how people, as consumers, make their decisions.
Total and Marginal Utility.
In developing a theory of consumer behaviour, based on the utility gained from the consumption of a good or service, one must begin by considering the consumption of a single unit of a product (Lipsey, Courant and Ragan, 1999:140). In developing the theory, it is important to make a distinction between the consumer's total utility, which is the full satisfaction resulting from the consumption of that product by a consumer (Lipsey et al, 1999:140), and the consumer's marginal utility, which is the change in satisfaction resulting from consuming a little more of the product (Lipsey et al, 1999:140).
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The Law of Diminishing Marginal Utility.
The law of diminishing marginal utility states: "The utility that any consumer derives, from successive units of a particular product diminishes as total consumption of the product increases, if the consumption of all other products is held constant" (Lipsey et al, 1999:140).
Using water as an example, this theory can be explained. Some minimum quantity is essential to sustain life, and a person would, if necessary, give up his or her entire income to obtain that quantity of water (Drexel, 2002).