UTILITY

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Utility or total utility (TU) refers to the amount of total satisfaction a person gets from consumption of a certain item.

Marginal Utility (MU) refers to the extra utility a consumer gets from one additional unit of a specific product.

MU = change in TU / change in Q

The law of diminishing marginal utility states: successive units of a product yield smaller and smaller amounts of marginal utility.

Example: If you can have a Big Mac for free, can you have an unlimited amount at one time? As you have the first Big Mac, you probably will have a very high satisfaction level. What about the satisfaction level when you are eating the second one, the third one, or the fourth one? Your satisfaction level from successive units of Big Macs will decline. In another words, your MU decreases. Eventually your MU will be zero and then even negative. Your TU may continue to increase until you have negative MU. Then your TU will decrease also. Although consumer wants in general are unlimited, wants for specific items can be fulfilled at one time. This means that to encourage additional consumption, price must fall. Diminishing marginal utility helps to explain the law of demand.

In the following table, you may see the relationship between total utility and marginal utility.

GOOD X (PRICE=$1)

GOOD Y (PRICE = $2)

QUANTITY

Marginal Utility

Total UTILITY

QUANTITY

Marginal Utility

Total UTILITY

1

8

8

1

10

10

2

7

15

2

8

18

3

6

21

3

6

24

4

5

26

4

4

28

5

4

30

5

3

31

6

3

33

6

2

33

7

2

35

7

1

34

Adding MU from each unit together will give you your TU. On the other hand, Subtracting MU from the TU will yield the MU.

For example,

1.  MU at Qx = 1 is 8, and Qx= 2, is 7, TU from the first and second units of X is 8+7 = 15.

2. TU of six units of X is 33, TU of five units of X is 30, MU of the sixth unit of X is 33-30 = 3. Since the change is quantity in this example is 1, the change in quantity can be neglected.

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