Total Utility in Economics: Definition and Example

The law of diminishing marginal utility means that as you use or consume more of something, you will get less satisfaction from each additional unit of that thing. Not all buyers will want three backpacks, even though they are the best deal. However, anyone who is shopping for backpacks needs at least one, so the first backpack has the highest price. After that, because the marginal utility of each additional backpack decreases, the business must decrease the cost per unit in order to entice shoppers to purchase more units. To understand how the law of diminishing marginal utility affects both consumers and businesses, it can be helpful to break down its components. The total utility is equal to the sum of utils gained from each unit of consumption.

After that, every unit of consumption to follow holds less and less utility. But they may see a high level of utility when mu is falling tu is in a different food, such as a salad. By diversifying its menu, the shop selling pizza can avoid diminished marginal utility and encourage consumers to purchase more. He is still hungry so he eats another chocolate bar, where his total utility is 25 utils.

Marginal Utility

The law of diminishing marginal utility is important in economics and business because it predicts consumer behavior. It can be used by businesses to find the balance in supply and production. It can inform a business’ marketing and sales strategies, as well. The law of diminishing marginal utility states that all else equal, as consumption increases, the marginal utility derived from each additional unit declines. Marginal utility is the incremental increase in utility that results from the consumption of one additional unit.

b) TU is falling and MU is negative

Consumers handle the law of diminishing marginal utility by consuming numerous different goods, which keeps the utility for each one high. Utility is the degree of satisfaction or pleasure a consumer gets from an economic act. For example, when hungry, a consumer can purchase a sandwich to eat so they are no longer hungry. All those goods and services which have the capacity to satisfy human wants are said to contain utility in the viewpoint of economics.

Consumer behavior helps to predict the demand for goods and services, which impacts supply and prices—all key metrics of analyzing an economy. Each individual unit of a good or service has its own utility and each additional unit of consumption will have its own marginal utility. The total utility will be the aggregated sum of utility gained from all units being studied. Marginal utility is the enjoyment a consumer gets from each additional unit of consumption. If you buy a bottle of water and then a second one, the utility gained from the second bottle of water is the marginal utility.

1. You’re so full from the first four slices that consuming the last slice of pizza would result in negative utility.
2. Rational choice theory says that consumers seek to maximize their utility with each unit of consumption.
3. Consumer theory and demand theory suggest that consumer actions are driven toward utility maximization by attempting to acquire the most satisfaction possible in the most affordable way.
4. After that, because the marginal utility of each additional backpack decreases, the business must decrease the cost per unit in order to entice shoppers to purchase more units.
5. Total utility helps economists understand the demand for goods and services.
6. The law of diminishing marginal utility directly relates to the concept of diminishing prices.

“Utility” is an economic term used to represent satisfaction or happiness. Total utility is often compared to marginal utility, which is the satisfaction a consumer receives from consuming one additional unit of a good or service. Total utility helps economists understand the demand for goods and services. In the diagram, TU is the total utility curve and MU is the marginal utility curve. As the consumer consumes the first unit of commodity, s/he obtains 10 utils of utility.

With the fourth slice of pizza, you experience a diminished marginal utility as well. It might be difficult to eat because you’re already full from the first three slices. You’re so full from the first four slices that consuming the last slice of pizza would result in negative utility. The law of diminishing marginal utility directly relates to the concept of diminishing prices.

MU of the commodity becomes negative when TU of a commodity is

After the 6th unit consumption of goods, MU is negative (-2) and due to negative MU, total utility declines to 28 utils from 30 utils. Thus, the consumer gets maximum satisfaction when MU is zero and that point is known as the point of saturation. When marginal utility is negative, then total utility will decrease. This means that an individual does not derive any satisfaction from the consumption of an additional unit of a good or service and is worse off by doing so.

Total Utility Maximization

“Satisfaction” is a subjective measure and will vary from individual to individual, meaning that total utility acts more as a guide in understanding a consumer’s psychological decisions. There is a direct relationship between total utility and marginal utility. Total utility is always based on marginal utility as a total utility (TU) is the summation of marginal utilities.

The third chocolate bar has a total utility of 27 utils, and the fourth has a total utility of 24 utils. The law of diminishing marginal utility also will not apply if the commodity being considered is money. The utility of money does not decrease as a person acquires more of it. When you eat the first slice of pizza, you gain a certain amount of positive utility from eating. Because you were hungry and this is the first food you’ve eaten lately, the first slice has a large benefit.

The relationship between TU and MU can be explained with help of the following table. For example, a company may benefit from having three accountants on its staff. But if there is no real need for a third, hiring one results in a diminished utility due to the minimum benefit gained. If you have two accountants but no one to process paperwork, hiring a new administrative assistant has a higher level of utility than hiring a third accountant.

The Law of Diminishing Marginal Utility: How It Works, With Examples

1. Therefore, the first unit of consumption for any product is typically highest.
2. The utility of money does not decrease as a person acquires more of it.
3. There is a direct relationship between total utility and marginal utility.
4. After that, every unit of consumption to follow holds less and less utility.
5. Because they have little need for, and therefore see less value in, a second vacuum cleaner, the same individual is willing to pay only $20 for it.
6. Utility is the degree of satisfaction or pleasure a consumer gets from an economic act.

After you eat the second slice of pizza, your appetite is becoming satisfied. You’re not as hungry as before, so you experience a smaller benefit and less enjoyment with the second slice than with the first. The third slice holds even less utility since you’re only a little hungry at this point.