WHAT?: One of three basic questions of allocation (the other two are How? and For Whom?). Answering the 'What?' question of allocation determines the types and quantities of goods and services produced with society's limited resources. Should society produce hammocks or hot fudge sundaes? Computers or Cadillacs? Birdfeed or battleships? The production possibilities analysis sets the stage for answering the 'What?' question.
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The total satisfaction of wants and needs obtained from the use or consumption of a good or service. This is the cumulative amount of utility generated from consuming a good over a given time period. Total utility is most often used in consumer demand theory to indicate how much overall satisfaction someone obtains from a given activity. The primary behavioral motivation used in consumer demand theory is the goal of maximizing total utility. Total utility is also used to derive marginal utility. Total utility is the overall amount of satisfaction generated from consuming a good. This concept forms the starting point for the analysis of consumer behavior used to explain market demand and the law of demand. Total utility information is commonly presented in a table or represented by a total utility curve.
Total utility needs to be contrasted with the related term marginal utility. Total utility is the overall amount of satisfaction obtained from consuming several units of a good. Marginal utility is the additional amount of satisfaction obtained from consuming one additional unit 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.
Riding a CoasterTo illustrate total utility, consider the total 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 total utility he accumulates after each ride.
The table displayed at the right summarizes Edgar's results. Here are a few observations:
|Roller Coaster Utility
This last observation is important. Edgar is most satisfied, is happiest, has the greatest sense of well-being, from riding the Monster Loop Death Plunge roller coaster 6 times during his day at the Shady Valley Amusement Park. He would not be as satisfied with 5 or fewer rides or with 7 or more rides.
- Before his first ride of the day, Edgar receives no utility from riding the Monster Loop Death Plunge roller coaster. But what else would happen? No activity means no utility.
- After one ride, Edgar has a total of 11 utils of utility. Note that satisfaction is measured by the hypothetical unit "util."
- After two rides, Edgar is now up to 20 utils of satisfaction. More consumption means more total utility.
- A third ride increases Edgar's total utility up to 27 utils of satisfaction.
- Edgar's utility increases for the first 6 rides, reaching a high of 36 utils, before declining back to 32 utils.
- The total utility generated by Edgar, after all 8 rides on the Monster Loop Death Plunge roller coaster during the course of the entire day, is 32 utils.
- If Edgar wants to maximize his utility, he would ride the Monster Loop Death Plunge roller coaster only 6 times. The 7th and 8th rides actually cause his total utility for the day to decline.
The Consumption UnitThe quantification of total utility and the differentiation with marginal utility requires a clear designation of the good being consumed. In other words, what exactly is the consumption unit?
Suppose, for example, that Edgar spends the entire day at the Shady Valley Amusement Park riding the Monster Loop Death Plunge roller coaster. Total utility is the overall satisfaction of his roller-costing-riding wants and needs generated from ALL rides on the Monster Loop Death Plunge roller coaster during the day. Marginal utility is then the satisfaction generated from a single ride.
The consumption unit, however, could be expanded or narrowed depending on the focus of the analysis. For example, total utility could be the satisfaction generated during an entire summer spent riding the Monster Loop Death Plunge roller coaster at the Shady Valley Amusement Park, while marginal utility is the satisfaction derived each day of riding. Alternatively, total utility could be the satisfaction from a single ride on the Monster Loop Death Plunge roller coaster, while marginal utility is the satisfaction from each second spent on the ride.
The consumption unit used for specifying total and marginal 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 total utility per ride and marginal utility per second of a ride is the best breakdown. However, if Edgar pays for each ride, then total utility per day and marginal utility per ride is appropriate.
The Total Utility Curve
The total utility numbers presented in the preceding table do provide insight into the consumer behavior. However, more insight is often obtained by a graph of total utility, or the total utility curve. The exhibit at the right is the total utility curve for Edgar's 8 rides on the Monster Loop Death Plunge roller coaster.
|Total Utility Curve
Perusing the curve offers a few tidbits of information:
- The vertical axis measures total utility (in utils) and the horizontal axis measures the number of rides taken by Edgar.
- The curve begins at the origin. If Edgar does not ride, then he receives no utility.
- The total utility curve is shaped something like a hill. It rises for the first 6 rides, then falls for the rides 7 and 8. In general, Edgar's utility increases when he consumes a larger quantity.
- The total utility curve reaches a peak of 36 utils at 6 rides. This is the number of rides that maximizes Edgar's utility.
- These observations are consistent with those made for the total utility table of numbers.
A Final Word About SlopeOne last observation is that the total utility curve initially has a relatively steep, positive slope, which then flattens, and eventually turns negative. The slope of the curve has a direct bearing on marginal utility. It also reflects the law of diminishing marginal utility.
In particular, the slope of the total utility curve is marginal utility. 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.
TOTAL UTILITY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: March 1, 2024].
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