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1. Utility Theory

Utility Theory explains how consumers make choices based on their preferences and the satisfaction (utility) they derive from consuming goods and services.

Types of Utility:

  • Total Utility: The total satisfaction received from consuming a particular quantity of a good.
  • Marginal Utility: The additional satisfaction received from consuming one more unit of a good.

Law of Diminishing Marginal Utility:

  • As a person consumes more of a good, the additional utility from each extra unit decreases.

Real-Life Example:​

When eating pizza, the first slice provides high satisfaction (utility), but with each additional slice, the satisfaction decreases. This explains why people stop consuming after a certain point.