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Economists insist that individuals do not make choices willy-nilly. Rather, economists assume that individuals make choices in a purposeful way, one that seeks the maximum value for some objective. We assume that consumers seek to maximize utility and that firms seek to maximize profits.
Whatever is being maximized, choices are based on the marginal decision rule. Following this rule results in an allocation that achieves the greatest degree of utility or profit possible.
We also examined the model of utility-maximizing behavior. Economists assume that consumers make choices consistent with the objective of achieving the maximum total utility possible for a given budget constraint.
Utility is a conceptual measure of satisfaction; it is not actually measurable. The theory of utility maximization allows us to ask how a utility-maximizing consumer would respond to a particular event.
By following the marginal decision rule, consumers will achieve the utility-maximizing condition: Expenditures equal consumers’ budgets, and ratios of marginal utility to price are equal for all pairs of goods and services. Thus, consumption is arranged so that the extra utility per dollar spent is equal for all goods and services. The marginal utility from a particular good or service eventually diminishes as consumers consume more of it during a period of time.
Utility maximization underlies consumer demand. The amount by which the quantity demanded changes in response to a change in price consists of a substitution effect and an income effect. The substitution effect always changes quantity demanded in a manner consistent with the law of demand. The income effect of a price change reinforces the substitution effect in the case of normal goods, but it affects consumption in an opposite direction in the case of inferior goods.
In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction a consumer gets. Marginal utility tells how much marginal value or satisfaction a consumer gets from consuming an additional unit of good. Microeconomic theory states that consumer choice is made on margins, meaning consumers constantly compare marginal utility from consuming additional goods to the cost they have to incur to acquire such goods. A consumer buys goods as long as the marginal utility for each additional unit exceeds its price. A consumer stops consuming additional goods as soon as the price exceeds the marginal utility.
In microeconomics, marginal utility and the law of diminishing marginal utility are the fundamental blocks that provide insight into the consumer choice of quantity and type of goods to be consumed. The law of diminishing marginal utility states the marginal utility from an additional unit of consumption declines as the quantity of consumed goods increases. Consumers choose their baskets of goods by equating marginal utility of a good to its price, which is a marginal cost of consumption.
The price a consumer is willing to pay for a good depends on its marginal utility, which declines with each additional unit of consumption, according to the law of diminishing marginal utility. Therefore, the price decreases for a normal good when consumption increases. The price and quantity demanded are inversely related, which represents the fundamental law of demand in consumer choice theory.
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Total utility is the aggregate amount of satisfaction or fulfillment that a consumer receives through the consumption of a specific good or service. Total utility is often compared to marginal utility, which is the satisfaction a consumer receives from consuming one additional unit of a good or service. Total utility helps economists understand the demand for goods and services.
In economics, utility refers to the satisfaction gained from consuming a good or service. Total utility is usually defined as a quantifiable summation of satisfaction or happiness obtained from consuming multiple units of a particular good or service.
Utility and total utility are used in the economic analysis of consumer behaviors within a marketplace. Economists seek to quantify total utility using special calculations. Economists may also study several economic metrics in conjunction with total utility when seeking to understand how consumer behaviors align with supply and demand.
In economics, economists typically view changes in behavior and consumption by analyzing marginal increases and marginal decreases. Marginal changes will usually be either scaled increases or scaled decreases. In the case of total utility, marginal refers to the increasing or decreasing level of utility that is obtained with added consumptions.
Total utility is often studied alongside Rational Choice Theory and the Law of Diminishing Marginal Utility. Rational Choice Theory says that consumers seek to maximize their utility with each unit of consumption. Consumer theory and demand theory suggest that consumer actions are driven toward utility maximization by attempting to acquire the most satisfaction possible in the most affordable way. In general, classical economic theories show that most consumers want to get the highest possible level of utility per unit for the money they spend.
Total utility is usually measured in relative units called utils. When measuring total utility, analysis can span from one unit of consumption to multiple units. For example, a cookie provides a level of utility as determined by its singular consumption, while a bag of cookies may provide total utility over the course of time it takes to completely consume all the cookies in the bag.
To better understand total utility, one must understand the Law of Diminishing Marginal Utility, which states that as more of a single good or service is consumed, the additional satisfaction, referred to as marginal utility, drops. The first good consumed provides the highest utility, the second good has a lower marginal utility, and so on. Therefore, total utility grows less rapidly with each additional unit consumed of the same good or service.
Each individual unit of a good or service has its own utility and each additional unit of consumption will have its own marginal utility. The total utility will be the aggregated sum of utility gained from all units being studied.
"Satisfaction" is a subjective measure and will vary from individual to individual, meaning that total utility acts more as a guide in understanding a consumer's psychological decisions.
A total utility formula will include utils. Utils are typically relative and assigned a base value. Economists usually analyze utils across a spectrum to provide a comparative analysis of the amount of util or satisfaction gained from a unit of consumption. An assigned base value for utils is needed because theoretically there is no real value for utility satisfaction in general.
To find total utility economists use the following basic total utility formula:
TU = U1 + MU2 + MU3 …
TU = Total Utility
U = Utility
MU = Marginal Utility
The total utility is equal to the sum of utils gained from each unit of consumption. In the equation, each unit of consumption is expected to have slightly less utility as more units are consumed.
Economic theory regarding consumer activities suggests that the primary goal of the consumer is to achieve the largest amount of utility for the least amount of cost. This is partly due to the limited amount of funds a person may possess, as well as a desire to achieve as much satisfaction from the consumption of goods and services as possible.
For example, if a consumer is presented with two purchasing options with the same financial cost, and neither option is more necessary or functional than the other, the consumer will choose the good or service that provides the most utility for the money.
John is hungry and decides to eat a chocolate bar. His total utility from eating one chocolate bar is 20 utils. He is still hungry so he eats another chocolate bar, where his total utility is 25 utils. John is still hungry and has two more chocolate bars. The third chocolate bar has a total utility of 27 utils, and the fourth has a total utility of 24 utils. This is best represented in the table below.
With each additional chocolate bar, John's total utility increases, until it reaches its max at three chocolate bars. With the fourth chocolate bar, John's total utility decreases. This can be understood with marginal utility; the utility that John derives from each additional chocolate bar.
With every additional chocolate bar after the first, John's marginal utility is decreasing, meaning that he is deriving less satisfaction from another chocolate bar. This makes sense as he is getting more full with each bar. After the third bar, his marginal utility is negative, meaning he is deriving no satisfaction and in fact is made worse off; perhaps feeling sick after consuming so much chocolate and sugar.
Total utility is the aggregate satisfaction that an individual receives from consuming a specific quantity of a good or service.
While total utility measures the aggregate satisfaction an individual receives from the consumption of a specific quantity of a good or service, marginal utility is the satisfaction an individual receives from consuming one additional unit of a good or service. If marginal utility is positive then total utility will increase. Once marginal utility is negative, then total utility will decrease.
The basic formula to calculate total utility is as follows:
TU = U1 + MU2 + MU3 …
TU = Total Utility
U = Utility
MU = Marginal Utility
Marginal utility is calculated as follows:
MU = Change in Total Utility / Change in Units
Total utility does not always increase. When marginal utility is negative, then total utility will decrease. This means that an individual does not derive any satisfaction from the consumption of an additional unit of a good or service and is worse off by doing so.
Utility measures the satisfaction an individual receives from the consumption of a good or service. Total utility measures the total satisfaction from a specific quantity of goods or services. Total utility operates hand in hand with marginal utility, which measures the additional satisfaction received from the consumption of a good or service. As long as marginal utility is positive, total utility will increase. Once marginal utility is negative, then total utility will decrease.
Economists aim to study total utility and marginal utility to understand consumer behavior. Consumer behavior helps to predict the demand for goods and services, which impacts supply and their prices; all key metrics of analyzing an economy.