Economics of Utility
- This is the measure of usefulness, satisfaction, e.t.c
- Maginal utilty measures the utility gained from an extra unit consumed.
Example of Marginal and Total Utility for Books
|Quantity (Q)||Total Utility||Marginal Utility|
- On most goods, the Marginal Utility falls as you increase consumption of that particular good.
- We can equate utility to the price we are willing to pay. E.g. for the first textbook, we may be willing to pay £30, so our marginal utility = £30. But, for a second textbook, the marginal utility may only be £28.
- For instance the MU of you first chocolate bar will be high, the second less and so on
- In general goods are not free. To maximse total utility, consumers will arrange their consumption, so that the ratio of MU to P is the same for each good.
- E.G. the last pound spent on each item gives the same utility.
MUa = Pa
MUb = Pb
see also: Marginal utility theory
Why Do Diamonds Cost More than Water?
- It is important to understand that the Total Utility differs between items e.g. Total Utility of water is greater than the Total Utility of diamonds. However the Marginal Utility of an extra litre of water is close to 0, but the Marginal Utility of your first diamond may be quite high.
- If you were in a desert the MU of water would be high and diamonds low
- Diminishing MU explains why demand curves slope down. To encourage you to buy more chocolate bars the price needs to fall.
- The economic value of diamonds
Essays and Revision Notes on Supply and Demand
- Market Equilibrium
- Price Mechanism Long Term
- Demand and Utility
- Consumer and Producer Surplus