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TotalandMarginalUtility

TotalAndMarginalUtility
Utilityisthesatisfactionthatapersonderivesfromtheconsumptionofagoodorservice.Total
utilityisthetotalsatisfactionreceivedfromconsumingagiventotalquantityofagoodorservice,
whilemarginal utilityisthesatisfactiongainedfromconsuminganotherquantityofagoodor
service.Sometimes,economistsliketosubdivideutilityintoindividualunitsthattheycallutils.
However,becauseutilityissubjective,meaningthatitdiffersfrompersontoperson,andbecauseit
variescontinuously,dependingonthequantityconsumed,anutilcannotactuallybemeasured,butis
simplyaheuristicdevicethatallowseconomiststotalkaboutthedegreeofsatisfactionofaproduct
orservice.
Althoughonedefinitionofutilityisusefulness,usefulnessisnotaqualityineconomicutility.For
instance,waterisveryuseful,butdoesn'thavemuchutilityformostpeople.Ontheotherhand,
judgingbyrecentgoldpricesinthemarket,goldhasgreatutilityforsomepeople,butitisnotvery
useful.
Onequalityofmarginalutilityisthatitalwaysdeclinesforeachsuccessivequantityconsumedofa
particulargood.Ifyoulikeicecream,andyoueatonescoop,thefirstscoopwillprovidethegreatest
satisfaction.Ifyoueatanotherscoop,you'llprobablyenjoythatalso,butthesatisfactionwillbeless
thanforthefirst.Atsomepoint,youwillnotwantanymoreicecream.Themarginalutilitywilldrop
tozeroandwillevenbecomenegative.Thisisaneverydayillustrationofthelaw of
diminishing marginal utility.Marginalutilitydeclinesforeverything,includingmoney.
Althoughmanypeoplewanttoamassgreatwealth,eachdollarthatisaccumulatedbecomesworth
lessandless,becausethemarginalutilityofwhatitcanbuydeclines.

Quantity

Marginal Total
Utility Utility

10

10

18

24

28

30

30

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Decliningmarginalutilityexplainswhythedemandcurveslopesdownwardasthesupplyquantityis
increased,andwhypeoplewillonlyconsumemoreifthepricedeclines,sincepeople'swillingnessto
payalsodeclines.
Marginalutilitycanalsoberelatedtotheelasticityofdemand.Ifdemandisinelastic,thenthe
quantitydemandeddropsoffsharplyasthepriceincreaseswithelasticdemand,quantitydropsoff
moreslowly.Soaproductforwhichthereisinelasticdemandwillhaveamarginalutilitythatdrops
offsharply,whileaproductwithelasticdemandwillhaveamarginalutilitythatdeclinesmore
slowly.

ConsumerChoice
Consumerchoiceisguidedbypreferencesforspecificproducts,budgetconstraints,prices,andthe
marginalutilityofproducts.Abudgetconstraintexistsbecausetheconsumeronlyhassomuch
money,sohecanonlyspendsomuchtherefore,evenamongthingsthathedesires,hemuststill
makeachoice.Thischoicewilldependonthemarginalutilityoftheproductanditsprice.Because
marginalutilitydeclineswithquantity,whilethepricedoesnotvary,aconsumerwilltendtobuyas
muchproductuntilthemarginalutilityoftheproductfallsbelowthemarginalutilityofother
productsthattheconsumercanbuy.Hence,theconsumerstopsbuyingmoreofaproductwhenthe
marginalutilityofanadditionalamountislessthanitsprice.Inthisway,thetotalutilityofwhatthe
consumercanpurchasewithinhisbudgetismaximized.Sothemarginalutilityofeachtypeof
productdividedbyitspricewillberoughlyequaltothemarginalutilityoftheotherproductsthatthe
consumerpurchaseddividedbytheirprices.
MarginalUtilityofProductA
PriceofProductA

MarginalUtilityofProductB
PriceofProductB

IndifferenceCurveAnalysis
Howconsumerchoicevarieswithmarginalutilityissometimesdepictedwithindifferencecurves.
Eachpointonanindifference curverepresentsacombinationofproductsthatyieldsthesame
totalutilityfortheconsumer.Becauseeachconsumer'spurchasingpowerislimited,thisbudget
constraint,representedbyabudget line,limitsthechoicesthattheconsumercanactuallymake.
Indifferencecurveanalysisissimplifiedbyassumingthattheconsumerspendsallofhermoneyon2
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Indifferencecurveanalysisissimplifiedbyassumingthattheconsumerspendsallofhermoneyon2
products.Forinstance,supposetheconsumerhas$12tospendoncantaloupesandapples.Each
cantaloupecosts$2apieceandeachapplecosts$1apiece.Thefollowingtableshowswhatcanbe
purchased:

Apples

Cantaloupes

10

12

This yields the following budget line:

Anindifferencecurveforthisexamplewouldyieldeverycombinationofapplesandcantaloupes
thatyieldthesametotalutility.Indifferencecurvesareconvextotheoriginbecauseofthelawof
diminishingmarginalutilitywhenthereisapredominanceofcantaloupes,thenthemarginal
utilityofanadditionalcantaloupeislessthanthemarginalutilityofanadditionalapple,andvice
versa.Inotherwords,consumerslikevariety.Atangentlinetoanindifferencecurverepresentsthe
marginal rate of substitution(MRS)ofoneproductfortheotherthatmaintainstotalutility.

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Anindifference mapcanbecreatedbyseveralindifferencecurvesrepresentinganincreased
budgetforapplesandcantaloupesthatallowstheconsumertobuymoreofeachproductfora
greatertotalutility.Generally,consumerswithhigherincomeswillhavelargerbudgetsforspecific
items.Intheabovediagram,forinstance,I1representstheindifferencecurveatthelowesttotal
utilityofthe3displayedinthediagram.Theconsumerwouldnotchooseanypointonthiscurve
becauseherhigherincomewithhercorrespondinglyincreasedbudgetforcantaloupesandapples
wouldallowhertoachievegreatertotalutilitybychoosingapointonindifferencecurveI2that
wouldstillbeaffordable.Whentheconsumer'sbudgetlineissuperimposedontheindifferencemap,
thepointwherethebudgetlineistangenttothehighestindifferencecurveisthehighestattainable
totalutility,giventheconsumer'sbudget,andrepresentstheconsumer'sequilibriumposition.
AlthoughcurveI3offershigherutility,thepriceofanycombinationofcantaloupesandappleson
thisindifferencecurveisoutsideofherbudget.

Informationisprovided'asis'andsolelyforeducation,notfortradingpurposesorprofessionaladvice.
Copyright19822016byWilliamC.Spaulding<http://thismatter.com/about.htm>

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