Total Utility (TU) refers to the overall satisfaction or benefit a consumer receives from consuming a given quantity of a good or service. It's a measure of the total level of satisfaction.

Marginal Utility (MU) is the additional satisfaction or benefit a consumer gains from consuming one more unit of a good or service. It represents the change in total utility resulting from consuming an extra unit.

Law of Diminishing Marginal Utility states that as a consumer consumes more and more of a good or service, the additional satisfaction gained from each additional unit will eventually decrease. In other words, MU tends to fall as quantity consumed increases.

Relationship to Total Utility: TU is the cumulative sum of MU. Initially, as MU is positive, TU increases at an increasing rate. However, as MU diminishes (due to the law of diminishing marginal utility), the rate of increase in TU slows down. Eventually, MU can become negative (if the good is consumed excessively), and TU will then start to decrease. The point where MU equals zero represents the point of maximum total utility.

Diagram: (A diagram would be included here, showing a typical U-shaped curve for total utility. The x-axis would represent quantity consumed, and the y-axis would represent total utility. The MU curve would be shown below the TU curve, illustrating its diminishing nature.)

Note: A diagram is crucial for a complete answer. It should clearly label the axes, the TU curve, and the MU curve.

The cornerstone of marginal utility theory is the assumption of rational consumers, who strive to maximise their overall utility by allocating expenditure in a way that equates the marginal utility per pound spent. However, this assumption is a significant simplification of real-world consumer behaviour and is often demonstrably flawed. Several factors lead consumers to deviate from this rational model:

• Cognitive Biases: Consumers are susceptible to various cognitive biases that systematically distort their decision-making. Loss aversion, for example, leads individuals to feel the pain of a loss more strongly than the pleasure of an equivalent gain, resulting in irrational choices (e.g., holding onto losing investments for too long). Framing effects demonstrate how the way information is presented can influence choices, even if the underlying options are objectively the same.
• Emotional Influences: Purchases are often driven by emotions rather than purely rational calculations. Impulse buying, fuelled by excitement or stress, is a clear example. Similarly, consumers may purchase goods simply because they evoke positive feelings or social status, regardless of their marginal utility.
• Limited Information and Time Constraints: Rational decision-making requires complete information and the ability to process it efficiently. In reality, consumers often operate with incomplete information and limited time. This leads to satisficing – choosing an option that is "good enough" rather than searching for the optimal one. The complexity of modern markets further exacerbates this issue.
• Social Influences: Consumers are heavily influenced by social norms, peer pressure, and advertising. Conformity and the desire for social acceptance can lead individuals to purchase goods they don't necessarily need or that don't maximize their utility.

While marginal utility theory provides a useful framework for understanding consumer behaviour, its reliance on perfect rationality is an oversimplification. The factors outlined above highlight the limitations of this assumption and demonstrate that consumers are often driven by a complex interplay of emotions, biases, and social influences.

Key Determinants of an Individual Demand Curve (other than price):

• Consumer Income: As explained above, a change in income affects demand. Higher income generally increases demand for normal goods and decreases demand for inferior goods.
• Consumer Preferences: Changes in tastes, fashion, or advertising can significantly alter demand. Increased popularity of a good will increase demand, while decreased popularity will decrease demand.
• Prices of Related Goods:

  • Substitutes: If the price of a substitute good increases, demand for the original good will increase (e.g., if the price of coffee increases, demand for tea might increase). This results in a rightward shift.
  • Complements: If the price of a complementary good increases, demand for the original good will decrease (e.g., if the price of petrol increases, demand for cars might decrease). This results in a leftward shift.

• Consumer Expectations: If consumers expect prices to rise in the future, they may increase their current demand. Conversely, if they expect prices to fall, they may decrease their current demand.

Explanation: Each of these determinants influences the quantity demanded at any given price. Changes in these factors cause the entire demand curve to shift. The direction of the shift depends on the relationship between the determinant and the demand curve (e.g., positive relationship for income, negative relationship for price of substitutes).