Consumers place a value on what they receive when they pay for a good or service. Utility refers to the satisfaction or happiness a consumer gets from a good or service.
Utility plays a key role in consumer theory, which is concerned with how consumers decide how to spend their money. Consumers’ options are determined by their income level, their budgetary constraints, their needs, their wants, and their personal preferences.
The utility of a good or service indicates a consumer’s willingness to spend. Different types of people need to know this. Utility will be used by macroeconomists and business analysts to determine and predict market behavior. As a consumer, you always consider utility when you decide whether or not to spend your money on something.
Understanding utility empowers you to navigate the economy intelligently. It will help you make the right choices. No matter if you are a market analyst or consultant determining prices and consumer behavior, or if you are a business owner buying goods and services for your company.
WHAT IS TOTAL UTILITY?
Utility is the sum of all the benefits gained from a specific amount of a good or service. As a continuation of our soda example, imagine how you would feel if you drank multiple sodas. You enjoyed the first glass of soda if you said it was worth four utils. It was so good that you wanted a second. Two sodas would provide you with six utils of satisfaction.
Because those two sodas were so delicious, you decide to have three of them. Your happiness with three sodas is seven utils, and you enjoy the experience. Let’s say you feel bold and want a fourth soda.
You begin to feel full and a bit sick, however. You don’t enjoy it as much as you would if you just drank two or three sodas. Once you have four sodas, we say you are back at four utils, which is where you started. Thus, you would be just as satisfied if you drank one or four sodas.
WHAT IS MARGINAL UTILITY?
Consumers’ marginal utility changes when one or more new units of a good or service are added. After your second soda, your satisfaction increases by two. After you drink your third soda, your total utility increases by one util, bringing you to a total of seven.
As you begin to feel sick after the fourth soda, your satisfaction decreases, so much so that you are back to where you started with one soda at four units.
Though your total utility increased for the second and third sodas, your marginal utility slowed down and eventually decreased. According to this law, marginal utility decreases with every additional unit of the good or service.
The greatest level of satisfaction as a consumer occurs when your needs or wants are met with the first unit of the good or service. Although the following additions may increase your overall satisfaction, each new unit by itself cannot surpass the initial satisfaction of the previous unit. Very few products or services can reverse this trend.
HOW TO CALCULATE MARGINAL UTILITY?
Because marginal utility is the change in utility caused by the addition of a new unit or units, you can calculate marginal utility as the change in total utility divided by the change in quantity. It would look like this:
Marginal Utility = Change In Total Utility / Change In Units
The change in total utility can be calculated by subtracting the current total utility from the previous total utility.
Subtract the current unit amount from the previous unit amount to calculate the change in units.
Here, “current” refers to the most recent utility event you have to deal with. Do not forget whatever previous total utility you used should match the previous unit amount.
TYPES OF MARGINAL UTILITY
A marginal utility is based on rates of change, so there are three types. They are:
Positive marginal utility
When the total utility between unit amounts increases, this is called a positive rate of change. We see positive marginal utility for the first three sodas in the example.
Zero marginal utility
In this case, there is no change in the total utility between unit amounts. Consider in the soda example that the utility for a third soda is six, just like it is for the second soda. That is a hypothetical zero marginal utility.
Negative marginal utility
There is a negative change in total utility between units when this occurs. We see a negative marginal utility between the third and fourth sodas in the soda example.
WHY SHOULD I CARE ABOUT MARGINAL UTILITY?
The marginal utility can be very helpful, regardless of whether you are a business owner or a consumer. Businesses can use marginal utility to predict consumer behavior. This can help them make decisions about pricing their goods and services, develop marketing strategies, and deal with competitors.
Businesses can use marginal utility to persuade consumers that what they offer is valuable. Likewise, marginal utility empowers the consumer. It allows them to decide how they will spend their money.
The soda example shows that a customer may be willing to buy multiple products or services. Nevertheless, with each additional unit, the consumer is less likely to allocate funds to the same good or service.
Your knowledge of marginal utility will lead you to efficiency and success whether you want to be a smart shopper or a successful business analyst.
What is an example of marginal utility?
Marginal utility is the difference in satisfaction you feel when you eat tasty food.
A cookie might bring you a lot of enjoyment, but a second might only bring half of that. A marginal utility is the increase in utility from acquiring or consuming one more unit of an item. Therefore, if we rate the utility of the first cookie as 10 utils, the marginal utility of the second cookie is 5 utils.
What is util?
Utility is an arbitrary metric that measures a consumer’s level of satisfaction after consuming or owning a good. A number used to compare how satisfied you feel after consuming a product.
What is utility?
Utility refers to the usefulness or pleasure-giving capacity of a product. As food satisfies hunger, fine wine satisfies a desire for refined tastes.
How do total utility and marginal utility differ?
Marginal utility measures the difference in utility between units of consumption, while total utility measures the sum of utility from all consumption.
For example, a person who receives 10 utils from one cookie and 5 utils from a second cookie receives a total utility of 15 utils. Between zero and one cookie, the marginal utility is 10 utils, while between one and two cookies, it is 5 utils.
When marginal utility is zero, what happens to total utility?
Total utility is at its maximum when marginal utility is zero. Additional units (for the time being) will provide no more utility to the customer because they have received all the satisfaction they crave from the product.
This relates to the law of diminishing utility, which posits that satisfaction tends to fall with each successive unit of consumption.