Outline

I.      Marginal Utility Theory

        A.      Measuring Utility
                1.      Utility is want-satisfying power, not necessarily usefulness.
                2.      Utility cannot be measured in reality, but in order to understand 
                        consumer theory, we assume that we can measure utility.
        
        B.      Two Measures of Utility--Total and Marginal
                1.      Total utility measures the total amount of satisfaction derived from the consumption of a good.
                2.      Marginal utility measures the addition to total utility that is due to he consumption of an additional unit of a good.
                3.      The law of diminishing marginal utility states that marginal utility eventually falls as additional units of a good are consumed.
                4.      Marginal utility can become negative.
        
        C.      Consumer Equilibrium
                1.      In equilibrium, marginal utility must be equal for the last dollar's worth of each good consumed.
        
        D.      From Marginal Utility to Demand
                1.      The law of diminishing marginal utility helps to explain why the demand curve is downward-sloping.
                2.      Note that because marginal utility eventually diminishes, consumers are willing to buy additional units of a good only if price falls.
        
        E.      Consumer surplus is the difference between what the consumer is willing to pay 
                for a good and the market price.
        
        F.      Resolving the Paradox of Value
                1.      Marginal utility theory can help to explain this paradox, which involves the relationship between price and value.
                2.      In a market economy, the more abundant a good is, regardless of its value to society, the lower its price.
                3.      The price of water relative to that of diamonds, and the value of water relative to that of diamonds, illustrates this point.  Diamonds are more 
                        scarce than water, so they command a higher price.