Total Utility Vs Marginal Utility

11 Key excerpts on "Total Utility Vs Marginal Utility"

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  eBook - ePub

  The Economic Analysis of Public Policy

  • William K. Bellinger(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  mutually beneficial trade , which in simple terms states that free and informed trade in a market generally benefits both buyers and sellers. Defining these net benefits for consumers and producers involves two crucial concepts in policy analysis, consumer and producer surplus. Each will be explained carefully below.

  In theory, the consumer will weigh the benefits and costs of each unit purchased and buy only those units for which the marginal benefits are greater than or equal to the marginal costs. The benefits of consumption are not directly measured in terms of money, and for good reason. The pleasure we receive from consumption is generally experienced in terms of an emotional or perceptual response, such as increased happiness or decreased discomfort. Economists summarize these non-monetary benefits in the rather dull word, utility .

  Definitions

  Marginal utility is the utility gained by consuming one more unit of a product.

  Total utility is the satisfaction gained from all units consumed. It also equals the sum of the marginal utilities of all units consumed.

  For most consumers and most products, the marginal utility of the second unit is less than that of the first unit, the marginal utility of the third is less than that of the second, and so on. This behavioral principle is called the law of diminishing marginal utility . For example, a hiker emerging from a desert trail may be in extreme discomfort due to thirst. His or her first glass of water will provide a high level of marginal utility because it eliminates the most urgent discomfort caused by his or her thirst. A second glass probably will also offer considerable marginal utility, but less than the first. This pattern of positive but decreasing marginal utility will continue for additional glasses of water that might be used for rinsing our face, our feet, or our pet. It is also common for marginal utility to eventually reach zero and then become negative. This would be consistent with the common phrase “too much of a good thing.”

  Under most circumstances, utility cannot be directly measured. However, in order to assess the benefits of public policy, we must have some way of measuring these benefits. Fortunately, the demand curve offers a simple way of approximating the marginal utility of consumption in dollar terms. The height of the demand curve at a given quantity represents the maximum consumers are willing to pay for that particular unit of the good. In Figure 2.5

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  Microeconomics as a Second Language

  • Martha L. Olney(Author)
  • 2015(Publication Date)
  • Wiley

    (Publisher)

  The more you consume of one particular item, the more utility you receive. If one apple is good, two are better. If two are good, three apples are better still. Economists say: Your total utility rises as you consume a greater quantity of any one item. The additional utility you receive from each additional apple is the marginal utility of that apple. The first apple gave you 50 utils of satisfaction. The second apple gave you 40 utils. The third apple gave you 25 utils. Your total utility from buying all three apples is 50 + 40 + 25 = 115 utils. The marginal utility of the second apple is 40 utils. The marginal utility of the third apple is 25 utils. Utility Maximization 61 Marginal utility is the change in total utility from consuming one more unit of an item. Marginal utility of consuming n th unit = Total utility from consuming n units − total utility from consuming n − 1 units Your total utility of consuming 2 pounds of beef is (let’s pretend) 1,800 utils. Your total utility of consuming 3 pounds of beef is 2,025 utils. So your additional utility from consuming the third pound of beef is the difference, 2,025 − 1,800 utils, or 225 utils. Economists would say: The marginal utility of consuming the third pound of beef is 225 utils. Because more is better—an assumption economists make—total utility always increases as the quantity of an item increases. The additional utility you receive from each additional unit of an item must therefore always be positive. Economists say: Marginal utility is always positive. More is better, but more and more and more is only a bit better. The addition- al utility we get from an additional unit of an item gets smaller and smaller and smaller as we consume more and more and more. The marginal utility diminishes —decreases—as quantity rises. Economists call this the law of diminishing marginal utility. A law, remember, is something that is nearly always true. TRY Answers to all “TRY” problems are in the back of the book.

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  From classical political economy to behavioral economics

  • Ivan Moscati(Author)
  • 2013(Publication Date)
  • Egea

    (Publisher)

  Let u denote the whole utility proceeding from the consumption of x. Then u will be, as mathematicians say, a function of x (p. 59). 2.2 The centrality of marginal utility Just as for Menger, so also for Jevons the key notion in the explanation of economic value was marginal utility – which Jevons called «final degree of utility» – rather than total utility: The final degree of utility is that function upon which the Theory of Economy will be found to turn (pp. 61-62). The reason for the priority of marginal utility over total utility, according to Jevons, is that we are able to assess the former much better than the latter: It is […] evident that we may know the degree of utility at any point while ignorant of the total utility […]. To be able to estimate the total enjoyment of a person would be an interesting thing, but it would not be really so important as to be able to estimate the additions and subtractions to his enjoyment, which circumstances occasion. In the same way a very wealthy person may be quite unable to form any accurate statement of his aggregate wealth; but he may nevertheless have exact accounts of income and expenditure, that is, of additions and subtractions (Jevons 1888, pp. 51-52). From a mathematical viewpoint, the relationship between total and marginal utility is straightforward. If, as is customary today, we start from the total utility function u, then marginal utility is the first derivative of u, namely u’. If instead, as it was for Jevons and the other early marginalists, the basic notion of utility theory is marginal utility, then the total utility function u can be obtained as the integral of the function u’. The centrality of marginal utility in Jevons’s theory draw also from his idea that the ultimate object of the economic calculus is the maximization of (total) utility: to maximize total utility it is sufficient to find the point where marginal utility is equal to zero.

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  An Introduction to Economics for Students of Agriculture

  • Berkeley Hill(Author)
  • 2013(Publication Date)
  • Pergamon

    (Publisher)

  The total utility schedule and the schedule showing the utility coming from the last suit purchased are shown in graphical form by Figs. 2.3 and 2.4. The Margin The concept of the margin is very important in Economics and is encountered in many facets of the subject. We can illustrate the concept of the margin using the dinner suit example. If the man does not stop at buying two dinner suits but buys a third, that third or additional suit can be regarded as the marginal suit. In more general terms, the last unit acquired is called the marginal unit. So instead of saying that the utility derived from additional suits as shown by Fig. 2.4 decreases, we can say that the utility generated by the marginal suit decreases as the number of suits the man possesses increases. The utility coming from this marginal suit is called marginal utility. This reduction in marginal utility with increases in the number of units already being consumed is so commonly experienced that it has been formulated into a law called the LAW OF DIMINISHING MARGINAL Explaining the behaviour of individuals 19 UTILITY. This says that the utility of additional units of a commodity to any consumer decreases as the quantity ofthat commodity he is already consuming increases. Other examples of this law might be; once one possesses a fountain pen or wrist-watch the satisfaction given by additional pens or wrist-watches is less than that given by the first; if attempting to play tennis, the first tennis ball and perhaps the second tennis ball will generate high utility, but additional tennis balls will give less satisfac-tion until the stage may be reached where the twenty-fifth or so tennis ball may give no additional satisfaction at all. It may even get in the way and be considered worse than nothing — it could generate negative utility or disutility. Examples can be cited where the utility from marginal units first increases and then decreases.

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  Principles of Engineering Economics with Applications

  • Zahid A. Khan, Arshad N. Siddiquee, Brajesh Kumar, Mustufa H. Abidi(Authors)
  • 2018(Publication Date)
  • Cambridge University Press

    (Publisher)

  (iii) The assumption of constant marginal utility of money: This is necessary if the monetary unit is used as the measure of utility. The essential feature of a standard unit of measurement is that it be constant. 50 Engineering Economics with Applications (iv) The diminishing marginal utility: The utility gained from successive units of a commodity diminishes. This is the axiom of diminishing marginal utility. (v) Total utility: The total utility of a basket of goods depends on the quantities of the individual commodities. If there are n commodities in the bundle with quantities x 1 , x 2 , x 3 ,…, x n. , the total utility is U = f(x 1 , x 2 , x 3 ,…, x n ). In very early versions of the theory of consumer behavior, it was assumed that the total utility is additive, U = U 1 (x 1 ) + U 2 (x 2 ) + … + U n (x n ). The additivity assumption was dropped in later versions of the cardinal utility theory. Additivity implies independent utilities of the various commodities in the bundle, an assumption clearly unrealistic, and unnecessary for the cardinal theory. 2.3.4 Equilibrium of the Consumer Using the simple model of a single commodity x, the consumer can either buy x or retain his money income M. Under these conditions, the consumer is in equilibrium when the marginal utility of x is equated to its market price (P x ). Symbolically, we have, MU x = P x. If the marginal utility of x is greater than its price, the consumer can increase his welfare by purchasing more units of x. Similarly, if the marginal utility of x is less than its price, the consumer can increase his total satisfaction by cutting down the quantity of x and keeping more of his income unspent. Therefore, he attains the maximization of his utility when MU x = P x . If there are more commodities, the condition for the equilibrium of the consumer is the equality of the ratios of the marginal utilities of the individual commodities to their prices.

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  Capital, Profits, and Prices

  An Essay in the Philosophy of Economics

  • Daniel M. Hausman(Author)
  • 2019(Publication Date)
  • Columbia University Press

    (Publisher)

  Total utility, U, holding the quantities of all other commodities constant, is represented by the vertical distance. The marginal utility of a commodity is in general a function of the quantities of all η commodities in a bundle. Holding the quantities of all but one commodity constant, one can represent marginal utility as a function of the quantity of that commodity alone. That function is the slope of the graph in Fig. 2.1. C A P I T A L T H E O R Y , UTILITY T H E O R Y 25 what they are parting with. The exchange ratio between two bundles of commodities is not entirely determined by the utility functions of the exchangers. It also depends on the quantities of various commod-ities the exchangers already possess or expect to possess. If two people have almost no water and no expectations of having more soon, the first will have to offer a high price to induce the second to part with any water. Knowing only the utility functions or only the amount of water available, one could not explain why water could be exchanged for so large a bundle of commodities. One needs both bits of infor-mation. The scarcity of water is derived from these two pieces of information; it is not an independent fact. In neoclassical analysis, scarcity is not just a fact about quantities. Whether a good is scarce depends on the relations among its quantity, the quantities of other commodities, and preferences of individuals. Walras in fact identifies scarcity and marginal utility (1926, §22, §75). To make such an iden-tification is reasonable since for a given agent (or in a given equilibrium state) χ is scarcer than y if and only if the marginal utility of χ is larger One can draw the graph of this partial marginal utility function as in Fig. 2.2. Here marginal utility, MU , not total utility, U, is measured in the vertical direction. The law of diminishing marginal utility asserts that the marginal utility curve will be downward sloping.

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  Microeconomics

  A Global Text

  • Judy Whitehead(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  Eventually, there is an additional unit consumed that adds nothing (zero) to the consumer’s total utility. This occurs at the quantity Q T . This is the point of satiation. After this, the addition to the total utility from an extra unit becomes negative ( < 0). As a result, the total revenue curve begins to decline. The marginal utility of good x ( MU X ) is the slope of the total utility function: U X = f ( Q X ) Hence, if tangents are drawn to the total utility curve, these tangents would continue to decrease in slope (i.e. get flatter) until the top of the total utility curve ( T ) is reached, when the tangent would be horizontal, having a slope of zero. This occurs at the quantity Q T of commodity x . Beyond this point, the slope of the tangents would become negative. U X MU X O Q X Q X MU X Q T TU [ U X = f ( Q X )] T O Q T C H A P T E R 2 Figure 2.1 The total utility curve and its related marginal utility curve 31 THEORY OF THE CONSUMER C H A P T E R 2 Consequently, in Figure 2.1, the relevant marginal utility ( MU ) curve, as measured by the slope of the total utility curve of good x , keeps declining until it reaches zero at the quantity Q T and then becomes negative. The demand curve The equilibrium condition was previously derived as: MU x = P x It can be seen that, along the marginal utility of x curve, for every level of marginal utility, there is a corresponding equilibrium price of good x . Hence: MU x 1 = P x 1 MU x 2 = P x 2 MU xN = P xN As a result of this corresponding relationship between the marginal utility of good x and its price, it means that the marginal utility can be replaced by price and so the marginal utility curve can be replaced by a curve relating price to the quantity of commodity x . This curve ( AB ) in Figure 2.2 is the demand curve. It is shown to be derived directly from the marginal utility curve (upper diagram). For each quantity, the relevant price is that at which MU = P .

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  Microeconomics

  Principles and Policy

  • William Baumol, Alan Blinder(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  For you, buying a pizza for your date has a higher priority than using the pizza to feed your roommate. If the price of pizzas is high, it makes sense for you to buy only enough for the high-priority uses—those that offer high marginal utilities. When price declines, however, it pays to purchase more of the good—enough for some lower-priority uses. The same general assumption about consumer psychology underlies both the “law” of diminishing marginal utility and the negative slope of the demand curve. They are really two different ways of describing the same assumed attitudes of the consumer. Indeed, it may well have struck you that this chapter’s discussion of the consumer’s decision process—equating price and marginal utility—does not resemble the thought processes of any consumer you have ever met. Buyers may seem to make decisions much more instinctively and without any calculation of marginal utilities or anything like them. That is true—yet it need not undermine the pertinence of the discussion. When you give a command to your computer, you actually activate some electronic switches and start some operations in what is referred to as binary code. Most computer users do not know they are having this effect and do not care, yet they are activating binary code nevertheless, and the analysis of the computation process does not misrepre-sent the facts by describing this sequence. In the same way, if a shopper divides her pur-chasing power among various purchase options in a way that yields the largest possible utility for her money, she must be following the rules of marginal analysis, even though she is totally unaware of this choice. A growing body of experimental evidence, however, has pointed out some persistent deviations between reality and the picture of consumer behavior provided by marginal analysis. Experimental studies by groups of economists and psychologists have turned up many examples of behavior that seem to violate the optimal purchase rule.

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  Intermediate Microeconomics

  • John H Hoag(Author)
  • 2012(Publication Date)
  • WSPC

    (Publisher)

  Note that we have not specified the units of measurement. Thus, we could use inches, angstroms, light years, meters, or any suitable measure we want. Furthermore, we need not start our measurement at zero. We could start the measurements at 5 or –700. All that matters is that the numbers get larger as we hit higher indifference curves and that each bundle on the same indifference curve gets the same number. This kind of utility number is called ordinal. That is, only the order of the numbers matters, not the relative magnitude. So a bundle with a utility number of 4 need not be twice as preferred as a bundle with the utility number of 2. Note as well that we could have chosen a different straight line from the origin, and the numbers assigned to the indifference curves would have changed, but the new assignment would still satisfy the requirements for utility. The bottom line is this: We pick some arbitrary measure and stick with it, but it does not matter which one we choose as long as we satisfy the utility requirements. The outcome of the analysis of utility maximization will not depend on the particular utility index chosen.

  What we have done is to establish a utility function, That is, we have assigned a utility number to each commodity bundle, and that assignment satisfies the requirements that U rises as we come to more preferred bundles and U stays the same along indifference curves.

  We may now define an important concept that is much used in economics: marginal utility. You will find the adjective “marginal” attached to a variety of nouns. Marginal means the added, the extra, the change in.

  Definition 2.20: The marginal utility relates the consumption of a good, X, and utility, and shows the change in utility when X changes, with the consumption of all other goods held constant. We denote marginal utility by MUx , where the subscript X is the good whose consumption is changing, or by .

  Exercise 26.  Suppose that we are at a commodity bundle and at that point, MUx is 5. Suppose that X increases by 0. 3 units. How much will utility rise as a result? What if we increase X by

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  Production, Growth, and the Environment

  An Economic Approach

  • William L. Weber(Author)
  • 2014(Publication Date)
  • CRC Press

    (Publisher)

  House-holds are demanders in the market for goods and services, but are suppliers of inputs such as land, labor, capital, and entrepreneurship. Likewise, business firms are demanders of inputs, but are suppliers of goods and services. 2.1.1 Utility Theory To study consumer choices between alternative competing wants economists rely on utility theory. Utility measures the amount of satisfaction an individual receives from consuming a given bundle of goods and services and economic theory only requires utility to be ordinal; i.e., consumers can rank various bun-dles according to their preferences, but are not required to determine whether 21 22 Production, Growth, and the Environment or not they like one bundle twice or three times as much as another bundle as would a cardinal utility function. Various assumptions are employed in utility theory: in general, more desirable goods are preferred to less and fewer unde-sirable goods (pollution) are preferred to more, substitution between two or more goods is possible, and preferences are subject to diminishing marginal rates of substitution. Suppose an individual consumes two goods—an environmental good like water (good x ) and other goods and services such as restaurant dinners, blue jeans, and housing (good y ). The two goods have prices p x and p y and the quantities the individual consumes are represented by x and y . An indifference curve represents all the various quantities of the two goods that yield the same level of utility. In general, as an individual consumes more of one good they must consume less of the other good to remain at the same level of utility. For instance, for the utility function u = x × y the equation of the indifference curve is found by solving for the quantity of one of the goods, say good y : y = u x . Table 2.1 gives the alternative quantities of the two goods that yield the same level of utility, say u = 10.

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  Microeconomics

  • David Besanko, Ronald Braeutigam(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  This means the consumer’s utility always increases when he purchases more food and/or clothing. (b) In both marginal utility functions, as the value of the denominator increases (holding the numerator constant), the marginal utility diminishes. Thus, MU x and MU y are both diminishing. Similar Problem: 3.4 87 3.2 UTILITY FUNCTIONS Indifference Curves To illustrate the trade-offs involved in consumer choice, we can reduce the three- dimensional graph of Brandon’s utility function in Figure 3.4 to a two-dimensional graph like the one in Figure 3.5. Both graphs illustrate the same utility function U xy . In Figure 3.5, each curve represents baskets yielding the same level of util- ity to Brandon. Each curve is called an indifference curve because Brandon would be equally satisfied with (or indifferent in choosing among) all baskets on that curve. For example, Brandon would be equally satisfied with baskets A, B, and C because they all lie on the indifference curve with the value U = 4. (Compare Figures 3.4 and 3.5 to see how the indifference curve U = 4 looks in a three-dimensional and a two-dimensional graph of the same utility function.) A graph like Figure 3.5 is sometimes referred to as an indifference map because it shows a set of indifference curves. Indifference curves on an indifference map have the following four properties. 1. When the consumer likes both goods (i.e., when MU x and MU y are both posi- tive), all the indifference curves have a negative slope. 2. Indifference curves cannot intersect. 3. Every consumption basket lies on one and only one indifference curve. 4. Indifference curves are not “thick.” indifference curve A curve connecting a set of consumption baskets that yield the same level of sat- isfaction to the consumer. (b) As H increases, MU H falls, so the consumer’s marginal utility of hamburgers is diminishing.

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