Resources | Subject Notes | Economics
Utility is a fundamental concept in economics that refers to the satisfaction or happiness a consumer derives from consuming a good or service. It is a subjective measure, meaning it varies from person to person.
Total utility represents the overall satisfaction a consumer gains from consuming a given quantity of a good or service. It is the sum of all utilities experienced from each unit consumed.
Example: If a consumer eats 2 slices of pizza and derives a utility of 10 from the first slice and a utility of 7 from the second slice, their total utility for eating 2 slices is 10 + 7 = 17.
Marginal utility is the additional satisfaction or benefit a consumer receives from consuming one more unit of a good or service. It measures the change in total utility resulting from a one-unit increase in consumption.
Example: Continuing the pizza example, the marginal utility of the second slice is 7. This means the consumer gains an additional 7 units of satisfaction from eating the second slice.
The law of diminishing marginal utility states that as a consumer consumes more and more of a good or service, the marginal utility of each additional unit tends to decrease.
Marginal utility is calculated as the change in total utility divided by the change in quantity consumed:
$$MU = \frac{\Delta TU}{\Delta Q}$$Where:
| Quantity Consumed (Q) | Total Utility (TU) | Marginal Utility (MU) |
|---|---|---|
| 0 | 0 | - |
| 1 | 10 | 10 |
| 2 | 17 | 7 |
| 3 | 24 | 7 |
| 4 | 28 | 4 |
| 5 | 30 | 2 |
The relationship between total utility and marginal utility is that the total utility curve typically rises to a point where marginal utility is zero and then falls. This is because as consumption increases, the additional satisfaction gained from each extra unit decreases.
The point where marginal utility becomes zero is where the total utility is at its maximum.