The total effect of a price change is decomposed into the substitution effect and the income effect. The substitution effect reflects the change in consumption due to the change in relative prices. The income effect reflects the change in consumption resulting from the change in real purchasing power caused by the price movement. Together, these two effects explain the consumer's total response to price fluctuations.

In economics, 'marginal' refers to the effect of an additional unit of a variable. It measures the change in a total value, such as total cost, total revenue, or total utility, resulting from a one-unit increase in production or consumption. Understanding marginal changes is crucial for decision-making, as it allows firms and consumers to determine the optimal level of activity by comparing the benefit and cost of the next unit.

Marshallian consumer surplus is derived from the law of diminishing marginal utility. As a consumer acquires more units of a good, the marginal utility of each additional unit decreases. Since the consumer pays a uniform price based on the utility of the last unit, they derive a surplus from the earlier units, which provided higher utility than the price paid.

According to the Law of Diminishing Marginal Utility, as a consumer consumes more units of a good, the additional satisfaction derived from each successive unit decreases. Maximum total satisfaction (total utility) is achieved when the marginal utility of the last unit consumed is zero. Consuming beyond this point would result in negative marginal utility.

Alfred Marshall is widely recognized for formalizing the concept of consumer surplus in his work 'Principles of Economics'. He defined it as the difference between the price that a consumer is willing to pay for a good and the price that they actually pay in the market.

The cardinal utility approach assumes that utility is measurable in 'utils'. Key assumptions include consumer rationality, limited income, and the goal of maximizing total satisfaction. Crucially, it assumes the marginal utility of money remains constant, not diminishing, to provide a stable yardstick for measuring the utility of other goods.

The point of satiety is the level of consumption where total utility is maximized. At this specific point, the consumer derives no additional satisfaction from consuming another unit of the good, meaning the marginal utility is zero. Consuming beyond this point would result in negative marginal utility, as total satisfaction would begin to decline.

Since Mac is indifferent between A and B, they must lie on the same indifference curve. Because he prefers B to C, B must lie on a higher indifference curve than C. By transitivity, if A is equivalent to B, and B is preferred to C, then both A and B must lie on a higher indifference curve than C.

At the point of satiety, a consumer has reached a state where they have consumed enough of a product, and any additional unit provides no further satisfaction. Consequently, the marginal utility—the benefit gained from one additional unit—becomes zero. If consumption continues beyond this point, marginal utility becomes negative, indicating that the additional units are causing disutility or discomfort.

The Kaldor-Hicks criterion suggests that a change is efficient if the winners from the change could theoretically compensate the losers and still be better off than they were before the change occurred, regardless of whether compensation actually happens.