Chapter 20, Problem 20.1LO

To determine

The difference between total and marginal utility and the reason for diminishing marginal utility.

Concept Introduction:

Utility refers to the amount of satisfaction a consumer gets from the consumption of a good or service. It can also be defined as the quality of the good to satisfy human wants. Utility is measured in terms of money and is thus, a relative concept.

Explanation of Solution

Total Utility refers to the total amount of satisfaction derived from the consumption of a good. It is the total satisfaction obtained from different units of the commodity.

While Marginal utility refers to the addition to the total utility when one more unit of a good is consumed. In other words, it is the additional utility derived from consuming one additional commodity.

Where,

- is the change in total utility

- is the change in quantity of good consumed

Law of diminishing marginal utility explains why marginal utility falls as a person consumes more of a good. This law states that the more we have of a commodity, the less we want to have more of it. As a consumer goes on consuming a particular commodity, each successive unit of the commodity will yield him less and less satisfaction.

For example, if we are very thirsty and buy a drink, the first drink will yield us maximum satisfaction as we really need the commodity at that time. After the consumption of the first drink, however, we are not thirsty anymore and we would not like to have another. The next additional drink will, therefore, give us less or negative satisfaction. Thus, satisfying the law of diminishing marginal utility. In the figure, below we can see that marginal utility or satisfaction from an additional utility is maximum at point a. Point b is the point of maximum satisfaction, at this point Total utility is maximum and marginal utility is zero. Any consumption beyond this point will result in a fall in total utility and cause marginal utility becomes negative.