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price
 
if it is 
useful
 
as well as 
scarce
. Its usefulness is shown by the fact that 
consumers demand it. In a world populated entirely by vegetarians, meat would not command a price, 
no matter how few cows or sheep there were because no one would want to eat meat. 
3.3 Utility 
Utility
 
is the word used to describe the pleasure or satisfaction or benefit derived by a person from the 
consumption of goods. 
Total utility
is the total satisfaction that people derive from spending their 
income and consuming goods. 
Marginal utility
is the 
satisfaction
gained
from consuming one 
additional
unit of a good or the 
satisfaction forgone 
by consuming one unit 
less
. If someone eats six apples and then eats a seventh, 
total utility refers to the satisfaction they derive from all seven apples together, while marginal utility 
refers to the additional satisfaction from eating the seventh apple, having already eaten six. 
3.4 Assumptions about consumer rationality 
Economists assume that consumers act rationally. This means, in turn, that: 
(a) 
Generally the consumer prefers more goods to less. 
(b) 
Generally the consumer is willing to substitute one good for another, provided its price is right. 
(c) 
Choices are transitive. This means that if, at a given time, a commodity A is preferred to B and B 
is preferred to C then we can conclude that commodity A is preferred to commodity C. 
Acting rationally means that the consumer attempts to 
maximise the total utility 
attainable with a 
limited 
income
. When the consumer decides to buy another unit of a good they are deciding that its marginal 
utility exceeds the marginal utility that would be yielded by any 
alternative
use of the price they pay. 
If a person has maximised their total utility, it follows that they have allocated their expenditure in such 
a way that the utility gained from spending the last penny spent on each good will be equal. 
We are now going to look at demand and supply in turn, before considering how they (demand and 
supply) interact through the price mechanism. 
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CHAPTER 4
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MICROECONOMIC FACTORS