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GROSS DOMESTIC PRODUCT, EXPENDITURES: A method of estimating gross domestic product (GDP) based on identifying the aggregate expenditures (consumption, investment, government purchases, and net exports) made by the four basic macroeconomic sectors (household, business, government, and foreign). This is one of two methods used by the Bureau of Economic Analysis in the National Income and Product Accounts to estimate gross domestic product.

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MARGINAL UTILITY:

The additional utility obtained from the consumption or use of an additional unit of a good. It is specified as the change in total utility divided by the change in quantity. Marginal utility indicates what each additional unit of a good is worth to a consumer and provides a theoretical basis for understanding market demand and the law of demand. Marginal utility generally declines with increased consumption of a good, a reflection of the law of diminishing marginal utility.
Marginal utility is the extra satisfaction generated from consuming one more unit of a good. Marginal utility is a clear-cut sign that economists are obsessed with all things marginal. This particular application of the marginal obsession is most important for the analysis of market demand, the law of demand, and consumer demand theory. Marginal utility is a key factor underlying the demand price that buyers are willing and able to pay for a given quantity of a good. Marginal utility information is commonly presented in a table or represented by a marginal utility curve.

Marginal utility needs to be contrasted with the related term total utility. Marginal utility is the additional amount of satisfaction obtained from consuming one additional unit of a good. Total utility is the overall amount of satisfaction obtained from consuming several units of a good. While the maximization of total utility represents the ultimate goal of consumption, a great deal of consumer behavior hinges on the marginal utility obtained from each unit of a good.

A Summary Formula

Consider this handy formula for specifying and calculating marginal utility:

marginal utility=change in total utility
change in quantity

If, for example, total utility increases from 11 utils to 20 utils with the consumption of one more unit of a good, then marginal utility is 9 utils. The change in total utility is 9. The change in quantity is 1.

Riding a Coaster

To illustrate marginal utility, consider the utility generated when Edgar Millbottom, Shady Valley's resident roller coaster aficionado, by spending the day riding the Monster Loop Death Plunge roller coaster at the local Shady Valley Amusement Park. Edgar takes 8 separate rides on the Monster Loop Death Plunge roller coaster, graciously recording the utility generated along the way.

Roller Coaster Utility
Marginal Utility


The table displayed at the right summarizes Edgar's results. In particular, it shows the total utility Edgar receives from his 8 rides on the Monster Loop Death Plunge roller coaster. While total utility indicates Edgar's overall satisfaction from his roller coaster excursions, marginal utility is a more useful concept, especially if he has to pay a price for each individual ride.

The key question, which is answered by marginal utility, is: How much extra utility does Edgar receive from each ride on the Monster Loop Death Plunge roller coaster?

  • The First Ride: For example, how much utility does Edgar's first roller coaster ride generate? Click the [First] button for an answer, is 11 utils of satisfaction. The answer, of course, is the difference between 0 utils for 0 rides and 11 utils for 1 ride. Because Edgar's first ride is his only ride at this point, total utility and marginal utility are the same.

  • The Second Ride: How much utility does Edgar's second ride add to his total? Click the [Second] button for an answer. Edgar adds 9 utils of satisfaction by taking his second roller coaster ride of the day. His utility increases from 11 utils for 1 ride to 20 utils for 2 rides, a marginal utility of 9 utils.

  • The Third Ride: A click of the button marked [Third] reveals that Edgar's third ride generates an extra 7 utils of satisfaction, the difference between 20 utils for 2 rides and 27 utils for 3 rides.

  • All the Rest: To avoid wasting too much valuable time, a click of the [All] button displays the marginal utilities for each of the remaining rides.

Taking Stock of the Numbers

With the complete list of marginal utility values listed in the table, consider a few observations:
  • First, perhaps the most obvious observation is that marginal utility is highest for the first ride, then decreases for each subsequent ride. This is a reflection of the law of diminishing marginal utility.

  • Second, marginal utility is positive for the first 6 rides, then becomes negative for the last 2. In other words, the seventh and eighth rides actually take away from Edgar's satisfaction. Edgar has less overall utility from 7 rides than he does from 6. This is consistent with the observation that total utility is maximized at 6 rides.

  • Third, as a matter of logical inference it seems safe to say that if a given ride generates less satisfaction that the previous one, then Edgar is probably willing to pay less for the additional experience. This further suggests that Edgar's demand price declines as the quantity of roller coaster rides increases.

  • Fourth, when marginal utility is positive, total utility is increasing from one ride to the next. However, when marginal utility is negative, total utility is decreasing.

The Consumption Unit

Calculating the change in utility resulting from a change in the consumption of good requires a clear designation of the good being consumed. In other words, what exactly is the consumption unit? The consumption unit is important for both marginal utility and the related notion of total utility.

Suppose, for example, that Edgar spends the entire day at the Shady Valley Amusement Park riding the Monster Loop Death Plunge roller coaster. Marginal utility is the satisfaction generated from a single ride on the Monster Loop Death Plunge roller coaster. Total utility is the overall satisfaction of his roller-coaster-riding wants and needs generated from ALL rides during the day.

The consumption unit, however, could be expanded or narrowed depending on the focus of the analysis. For example, marginal utility could be the satisfaction derived each day of riding the Monster Loop Death Plunge roller coaster at the Shady Valley Amusement Park, while total utility is the satisfaction generated during an entire summer. Alternatively, marginal utility could be the satisfaction from each second spent on the Monster Loop Death Plunge roller coaster ride, while total utility is the satisfaction from a single ride.

The consumption unit used for specifying marginal and total utility largely depends on the specific analysis. Economists are usually most concerned with incremental units that are purchased separately. If Edgar pays for each second he spends on the Monster Loop Death Plunge roller coaster, then marginal utility per second of a ride and total utility per ride is the best breakdown. However, if Edgar pays for each ride, then marginal utility per ride and total utility per day is appropriate.

The Marginal Utility Curve

The marginal utility numbers presented in the preceding table do provide insight into the consumer behavior. However, more insight is often obtained by a graph of marginal utility, or the marginal utility curve. The exhibit at the right is the marginal utility curve for Edgar's 8 rides on the Monster Loop Death Plunge roller coaster.

Looking over the curve offers a few tidbits of information:

  • The vertical axis measures marginal utility (in utils) and the horizontal axis measures the number of rides taken by Edgar.

  • The marginal utility curve is negatively sloped. Marginal utility is relatively high for the first ride, then declines for subsequent rides. This reflects the law of diminishing marginal utility.

  • The curve intersects the horizontal axis, with zero marginal utility, at a value of 6 rides. This corresponds with the maximum level of total utility at 6 rides. The curve is then below the horizontal axis, in the negative range, for rides 7 and 8.

  • These observations are consistent with those made for the marginal utility table of numbers.

A Final Word About Slope

One last observation to note is that marginal utility is the slope of the total utility curve. The slope of any curve is the "rise" over the "run," which is the change in the vertical axis (utility) divided by the change in the horizontal axis (rides). Marginal utility is specified as the change in total utility divided by the change in quantity. The two concepts are one and the same. Marginal utility IS the slope of the total utility curve.

<= MARGINAL REVENUE PRODUCT CURVEMARGINAL UTILITY AND DEMAND =>


Recommended Citation:

MARGINAL UTILITY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: October 21, 2014].


Check Out These Related Terms...

     | marginal utility curve | total utility | total utility curve | law of diminishing marginal utility |


Or For A Little Background...

     | util | utility | consumer demand theory | utility analysis | satisfaction |


And For Further Study...

     | utility maximization | constrained utility maximization | rule of consumer equilibrium | utility measurement | cardinal utility | ordinal utility | diamond-water paradox | marginal utility and demand | utilitarianism | marginal utility-price ratio | marginal utility and demand | income change, utility analysis | price change, utility analysis | preferences change, utility analysis | marginal cost | marginal product |


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