Marginal Utility

12 Key excerpts on "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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  Health Economics For Nurses

  Intro Guide

  • Stephen Morris(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  In general, the more of a good that an individual consumes the greater the total utility that they enjoy. After a certain saturation point, further consumption may cause total utility to fall, though individuals will not usually consume units of a good beyond this point. This may be compared with Marginal Utility, where the Marginal Utility from each successive unit of consumption decreases.

  Marginal Utility

  Marginal Utility is defined as the difference in utility arising from the consumption of one more or one less unit of a good. It is the rate at which total utility changes as we change our consumption of a good by one unit. For instance, if consuming 20 chocolate bars yielded 100 units of utility, and 21 chocolate bars yielded 102 units of utility, then the Marginal Utility of consuming the twenty-first chocolate bar is 2 units of utility. Algebraically, if TU

  n

  is the total utility from consuming n units of a good, and TU

  n + 1

  is the total utility from consuming n + 1 units of a good, then the Marginal Utility from consuming the n + 1th unit (MU

  n + 1

  ) is the difference between Tn and Tn + 1 :

  The principle of diminishing Marginal Utility states that while total utility increases with consumption, Marginal Utility falls. In other words, the extra satisfaction obtained from eating more and more chocolate bars leads to smaller and smaller rises in satisfaction. As consumption increases, total utility increases at a diminishing rate. Ultimately, Marginal Utility may even become negative, though it is unlikely that an individual would consume so much of a good that it would cause disutility.

  This relationship between quantity demanded, total utility and Marginal Utility may be seen more clearly using a numerical example.

  Table 2.1 presents a hypothetical example illustrating the relationship between the quantity of chocolate bars consumed, total utility and Marginal Utility. It can be seen that, up to a certain point, as the quantity of chocolate bars eaten per day rises so total utility rises also. Note that after consuming the ninth chocolate bar, however, total utility falls. At this point the individual will only receive displeasure or disutility from consuming more bars of chocolate. Marginal Utility decreases as the quantity of chocolate bars eaten increases. For example, 35 units of utility is obtained from consuming the fourth bar of chocolate, but only 25 units of utility is gained from consuming the fifth bar of chocolate. This same data may be seen graphically in Figure 2.2

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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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  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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  21st Century Economics: A Reference Handbook

  • Rhona C. Free(Author)
  • 2010(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  Diminishing Marginal Utility Consumer behavior rests on the desires that buyers have for commodities. The earliest method for representing these desires came from the idea set forth by Jeremy Bentham (1748-1832) that every human action increases or diminishes the happiness of the one taking the action (Bentham, 1907, p. 2). Eating an apple may cause a person's happiness to increase, while mopping the kitchen 80 · MICROECONOMICS floor may cause that person's happiness to decrease. The increase or decrease in happiness from each of these actions is called the utility from taking that action. The desire that a person has for a commodity, therefore, is related to the utility that the consumer receives from consuming it. Bentham also introduced the idea of diminishing Marginal Utility when he suggested that the quantity of happiness produced by a particle of wealth (each particle being of the same magnitude) will be less at every particle: the second will produce less than the first, the third less than the second, and so on (Bentham, 1952, p. 113). This concept has come to be known as the diminishing Marginal Utility of wealth (or income). The idea is that as one spends wealth, the utility received for each additional dollar is not constant but declines. Note that Bentham did not refer directly to the Marginal Utility of consuming a particular good or service itself. Jules Dupuit (1804-1866) did consider the utility of consuming a particular good. In his paper On the Measurement of Utility of Public Works (Dupuit, 1969), he argued that the utility of water purchased from a public water system declined as successive units were consumed. At a given price, people will only buy water for which the utility they receive exceeds that price. If the price falls, buyers will purchase additional water for uses that have a utility less than the higher price but more than the lower price (pp. 258-259).

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  From classical political economy to behavioral economics

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

    (Publisher)

  Part One 44 The satisfaction of any one specific need has, up to a certain degree of completeness, relatively the highest importance, and […] further satisfaction has a progressively smaller importance, until eventually a stage is reached at which a more complete satisfaction of that particular need is a matter of indifference (p. 125). This regularity was later called the principle of diminishing (or decreasing) Marginal Utility, and it implies that the subjective value of a good diminishes as its consumption increases. Menger (as well Jevons and Walras) took the principle of decreasing Marginal Utility as almost self-evident, and accordingly did not feel obliged to provide any comprehensive justification of it. 1.1.4 The economic value of goods Based on the principle of diminishing Marginal Utility, Menger arrived at a quantitative definition of economic value. He observed that each good typically satisfies different needs, each of which may have different intensities. For instance, wheat may be eaten, or sown, or used to feed the animals. In each possible use wheat displays decreasing Marginal Utility, and Menger (pp. 126-127) devised an illustration in which the numerical expression of the marginal utilities of each bushel of wheat were as follows: Marginal Utility of wheat if eaten Marginal Utility of wheat if sown Marginal Utility of wheat if fed to animals 1 st bushel 10 9 8 2 nd bushel 9 8 7 3 rd bushel 8 7 6 4 rd bushel 7 6 5 5 th bushel 6 5 4 6 th bushel 5 4 3 7 th bushel 4 3 2 8 th bushel 3 2 1 9 th bushel 2 1 0 10 th bushel 1 0 11 th bushel 0 Table 1: The marginal utilities of wheat according to Menger. Given the bushels of wheat at his disposal, the individual in question will first satisfy his most intense needs, and then the less intense ones.

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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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  The Economics of Resource Allocation in Health Care

  Cost-utility, social value, and fairness

  • Andrea Klonschinski(Author)
  • 2016(Publication Date)
  • Taylor & Francis

    (Publisher)

  In summary, the basic ingredients of Jevons’ economics are Bentham’s utilitarianism, psychophysiology, and the use of the differential calculus. Jevons strictly rejected the labor theory of value and made the individuals’ feelings of pleasures and pains the building blocks of his theory. Psychophysiology’s mechanistic conception of the human mind allowed him to apply the methods of the natural sciences and, in particular, mathematics to the investigation of individual decision making as a calculus of pleasure and pain. The application of the calculus, in turn, permitted Jevons to focus on marginal changes in the amounts of utility or, what comes to the same thing in a psychophysiological framework, on the marginal units of pleasure the individual economic agent derives from commodities. These changes are not proportional to the increase in the amount of a commodity but are in fact decreasing. This principle of diminishing Marginal Utility enabled Jevons to derive the equimarginal principle according to which the individual allocates his resources so as to maximize his own pleasure or, as it were, utility. Methodologically, the economic theory of utility-maximizing behavior can hence be considered the “child of the marriage of utility with the technique of marginal increments and decrements, which itself led directly to the consideration of extremal problems” (Dobb 1973: 172).

  As to the adoption of the Benthamite utility concept it deserves emphasis again that while Bentham’s Principles first and foremost addressed the legislator who should build institutions to the advantage of all, Jevons’ individualistic account of utility maximization was totally detached from any societal concerns. Here, the utility concept serves an explanatory function within demand theory. To accomplish that task, it referred to “subjective scales of valuation which were supposed to reside in the consumer’s mind” (Endres 1999: 602). Thereby, pleasure or utility are considered as being quantities that provide “agents with a monotonic criterion by which to carry out the ordering of the alternative outcomes they face” (Warke 2000a: 20). Put differently, utility provided for an ordering principle, explaining how subjects generate their preference rankings (see Mandler 2001: 374). The maximization of pleasure, then, was regarded as the subjects’ aim and motive for action. Henceforth, utility maximization in economics became more and more associated with the idea of individual rationality (see Cudd 1993: 106) and the problem an economic agent faces became framed as the problem of allocating his resources “in such a way that his well-being is enhanced to the greatest degree possible” (Colvin 1985: 9). The publication of TPE can thus be conceived as the hour of birth of the economic man, i.e., of the “discrete, self-contained, self-interested” individual of modern microeconomics (Colvin 1985: 5), aiming at the maximization of pleasure (see Little 1957: 10). Put differently, the TPE gave rise to the fundamental principle of modern economics that “economic behaviour is maximising behaviour subject to constraints” (Blaug 1997: 280).42

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  Lectures on Political Economy (Routledge Revivals)

  Two Volumes

  • Knut Wicksell(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  If the quantity consumed is increased by a small addition, Δa, then the total utility or satisfaction is increased by a corresponding amount, which we may designate Δf (a). The additional utility which arises when the quantity of the commodity is increased by one unit, i.e. the Marginal Utility, will then be expressed by the ratio.If we now suppose these quantities to become infinitesimal, the ratio will, as a rule, have a determinate limit which is the differential coefficient, or the first derivative of the function, f (a), with respect to a. The latter, which is usually indicated by or by f ′(a), is itself a function of a, and, in the present case, has the characteristic peculiarity of being a diminishing function of its variable, i.e. it diminishes when a increases. All this is, of course, only a symbolic expression of the theoretical argument already developed that the Marginal Utility falls—whilst the total utility obviously continues to grow, though in a diminishing degree—when the quantity consumed, per unit of time, increases. If we now apply the above argument to all the other kinds of commodities, (B), (C), (D), etc., some of which the consumer possesses at the outset, and the remainder of which he acquires by means of exchange at market prices, then we can express symbolically the conditions of equilibrium for the economy of the individual which have been described above; on the one hand, the Marginal Utility of each commodity is proportionate to its price, and, on the other, the total exchange value of the commodities given up is identical with the total exchange value of the commodities acquired

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  Principles of Agricultural Economics

  • Andrew Barkley, Paul W. Barkley(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  1 .

  Marginal Utility [MU]. The change in the level of utility when consumption of a good is increased by one unit. MU = ΔTU/ΔY.

  Opportunity Set. The collection of all combinations of goods within the budget constraint of the consumer.

  Ordinal Utility. A way of considering consumer satisfaction in which goods are ranked in order of preference: first, second, third, etc. (see Cardinal Utility ).

  Perfect Complements (consumption). Goods that must be purchased together in a fixed ratio.

  Perfect Substitutes (consumption). Goods that are completely substitutable, or where the consumer is indifferent between the two goods.

  Rational Behavior. Individuals do the best that they can, given the constraints they face. Rational behavior is purposeful and consistent.

  Total Utility [TU]. The total level of satisfaction derived from consuming a given bundle of goods and services.

  Utility. Satisfaction derived from consuming a good.

  Util. Hypothetical unit of satisfaction derived from consumption of goods or services.

  7.11 Review questions

  1. An individual who stays up so late that he feels sick the next day is:
     1. rational
     2. irrational
     3. not an economic individual
     4. cannot tell from the information given
  2. Placing a numerical value on the consumption of a piece of apple pie is an example of:
     1. normative economics
     2. cardinal utility
     3. ordinal utility
     4. positive economics
  3. Modern economics uses which type of consumer theory:
     1. cardinal utility
     2. ordinal utility
     3. total utility
     4. public utility
  4. Marginal Utility refers to:
     1. the extra level of electricity from a public utility
     2. the level of satisfaction from consuming a good
     3. utility derived from consuming a good
     4. a change in utility when consumption is increased by one unit
  5. When a consumer is indifferent between consuming an additional unit of a good:
     1. TU is negative
     2. MU is equal to zero
     3. TU is equal to zero
     4. MY is negative
  6. All of the following are assumptions about consumer behavior except:
     1. complete preferences
     2. consistent consumers
     3. nonsatiation
     4. relativity

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  A Short Course in Intermediate Microeconomics with Calculus

  • Roberto Serrano, Allan M. Feldman(Authors)
  • 2018(Publication Date)
  • Cambridge University Press

    (Publisher)

  We will describe and discuss the consumer’s rate of tradeoff of one good against another (called her marginal rate of substitution ). After discussing the consumer’s preferences, we will turn to her utility function . A utility function is a numerical representation of how a consumer feels about alter-native consumption bundles: if she likes the first bundle better than the second, then the utility function assigns a higher number to the first than to the second, and if she likes them equally well, then the utility function assigns the same number to both. We will analyze utility functions and describe Marginal Utility , which, loosely speaking, is the extra utility provided by one additional unit of a good. We will derive the relationship between the marginal utilities of two goods and the marginal rate of substitution of one of the goods for the other. We will provide various algebraic examples of utility functions, and, in the appendix, we will briefly review the calculus of derivatives and partial derivatives. 8 2 Preferences and Utility In this chapter and others to follow, we will often assume there are only two goods available, with x 1 and x 2 representing quantities of goods 1 and 2, respectively. Why only two goods? For two reasons: first, for simplicity (two goods gives a much simpler model than three goods or five thousand, often with no loss of generality); and, second, because we are often interested in one particular good, and we can easily focus on that good and call the second good “all other goods,” or “everything else,” or “other stuff.” When there are two goods, any consumption bundle can easily be shown in a standard two-dimensional graph, with the quantity of the first good on the horizontal axis and the quantity of the second good on the vertical axis.

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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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