Marginal-Utility.pptx

Marginal Utility  Marginal utility is a measure that defines the additional satisfaction a customer receives from one more unit of a product or service. It helps companies determine the number of products a consumer is eager to buy and assess how satisfaction influences consumer decisions. ...

Marginal Utility  Marginal utility is a measure that defines the additional satisfaction a customer receives from one more unit of a product or service. It helps companies determine the number of products a consumer is eager to buy and assess how satisfaction influences consumer decisions.  Why is the law of diminishing marginal utility important? Knowing the marginal utility allows companies to be aware of customers’ satisfaction or happiness with a certain product. This is because the level of fulfillment shapes consumers’ future purchasing decisions. If the measure indicates a high level of satisfaction and product success among buyers, it means that people will continue buying from a brand. That’s why a company can consider making deals with more suppliers and reaching new locales.  Types of Marginal Utility Positive marginal utility. You can see this type of marginal utility when an additional item brings happiness to a customer. Say, a person loves to eat cakes, so when they eat an extra slice, they enjoy it and get some positive emotions.  Zero marginal utility. When this type occurs, it indicates that an additional product didn’t manage to bring some more satisfaction to a consumer. For example, when a person eats two hamburgers and feels full, they wouldn’t enjoy having a third one.  Negative marginal utility. This indicates that if a customer consumes too much of a product, an extra portion might even harm their health. Say, if a person ate two slices of an apple pie, they could feel sick after the third one.  How to Calculate Marginal Utility Companies and individuals widely use marginal utility calculations to give a qualifiable worth to their products and services. With its help, they gauge the success of a particular item and adjust their production  Now let’s see the steps in detail to learn how to find the necessary measures. 1.Find the first total utility. To find an average measure, a manager needs to determine the total utility of a customer’s first visit. Total utility is the level of customer satisfaction from consuming a product or service. You need to sum up the prices a consumer is willing to pay for the first and each additional product to obtain the total utility. 1.Search for the second total utility. Analyze the information you have about the second visit. Pay attention to the sum of money a customer is ready to pay for your products and use the same approach. Add all the prices together to obtain the second total utility. 1.Calculate the difference. Once you figure out the total utilities of the visits, collect them to calculate the difference. The result you obtain will be the measure you need to use in the formula.  Estimate the difference between the number of goods. After obtaining totals, you need to sum up the purchased goods from the first visit. Do the same for the second visit. Afterward, subtract the totals from each other to get the second measure — quantity of goods difference  Marginal Utility Example Let’s imagine that there’s a very hungry office worker who decided to go to a cafe with veggie burgers on its menu. Although one veggie burger costs only $3, this visitor can even pay $6 for each. Therefore, the utility worth of one burger will be $6. During their stay in the cafe, the worker is eager to eat two burgers. Since this person already knows that they will be full after the first veggie burger, they are ready to pay $4 for the second one. As a result, the utility cost decreases. To find the total utility, we need to sum up the prices the worker is willing to pay. Total utility (1) = $6 + $4 = $10.  During the second visit to the cafe a month later, the worker wants to eat four burgers. After paying $6 for the first veggie burger, they decide that the second burger is only worth $5 because they don’t feel so hungry anymore. After they eat the second one, they would only pay $2 for each next burger. Total utility (2) = $6 + $5 + $2 + $2 + $2 = $17. Let’s find the total utility difference = $17 - $10 = $7. Quality of items difference = 5 - 2 = 3.  Now let’s estimate marginal utility: Marginal utility = 7 / 3 = 2.3. Hence, the marginal utility shows the level of satisfaction a customer can obtain from consuming an additional product or service. A consumer stops buying additional products when the price is higher than their marginal utility.  Total utility Total utility is the aggregate satisfaction that a consumer receives through the consumption of a goods or services. 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.  Understanding Total Utility 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. 1  Rational Choice Theory 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  The Law of Diminishing Marginal Utility To better understand total utility, one must understand the law of dminishing 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.  How to Calculate Total Utility 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.  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.  Total Utility Maximization 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. 1 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.  Example of Total Utility 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. Quantity Consumed Total Utility Marginal Utility 0 Bars - 1 Bar 20 utils 20 utils 2 Bars 25 utils 5 utils 3 Bars 27 utils 2 utils 4 Bars 24 utils - 3 utils  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.  What Is Total Utility? Total utility is the aggregate satisfaction that an individual receives from consuming a specific quantity of a good or service.  What Is the Relationship Between Total Utility and Marginal Utility? 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.  How Do You Calculate Marginal Utility and Total Utility? 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  Does Total Utility Always Increase? 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.