Q B.1.4.4 Discussion - Marginal and Total Utility-Diamond Water Paradox - Group A 5 From ECON-102-OMH-CRN55774 What Is Utility? Utility is a term in economics that refers to the total satisfaction received from consuming a good or service. Economic theories based on rational choice usually assume that consumers will strive to maximize their utility. The economic utility of a good or service is important to understand, because it directly influences the demand, and therefore price, of that good or service. In practice, a consumer's utility is impossible to measure and quantify. However, some economists believe that they can indirectly estimate what is the utility for an economic good or service by employing various models. Understanding Utility The utility definition in economics is derived from the concept of usefulness. An economic good yields utility to the extent to which it's useful for satisfying a consumer’s want or need. Various schools of thought differ as to how to model economic utility and measure the usefulness of a good or service. Utility in economics was first coined by the noted 18th-century Swiss mathematician Daniel Bernoulli. Since then, economic theory has progressed, leading to various types of economic utility. Investopedia video on UtilityLinks to an external site. What Is Marginal Utility? Marginal utility Links to an external site. is the added satisfaction that a consumer gets from having one more unit of a good or service. The concept of marginal utility is used by economists to determine how much of an item consumers are willing to purchase. Positive marginal utility occurs when the consumption of an additional item increases the total utility. On the other hand, negative marginal utility occurs when the consumption of one more unit decreases the overall utility. See the Investopedia video on Marginal UtilityLinks to an external site. The Definition of Total Utility If utility in economics is cardinal and measurable, the total utility (TU) Links to an external site. is defined as the sum of the satisfaction that a person can receive from the consumption of all units of a specific product or service. Using the example above, if a person can only consume three slices of pizza and the first slice of pizza consumed yields ten utils, the second slice of pizza consumed yields eight utils, and the third slice yields two utils, the total utility of pizza would be twenty utils. The Definition of Marginal Utility Marginal utility (MU) Links to an external site. is defined as the additional (cardinal) utility gained from the consumption of one additional unit of a good or service or the additional (ordinal) use that a person has for an additional unit. Using the same example, if the economic utility of the first slice of pizza is ten utils and the utility of the second slice is eight utils, the MU of eating the second slice is eight utils. If the utility of a third slice is two utils, the MU of eating that third slice is two utils. In ordinal utility terms, a person might eat the first slice of pizza, share the second slice with their roommate, save the third slice for breakfast, and use the fourth slice as a doorstop. The Law of Diminishing Marginal Utility To better understand total utility, one must understand the Law of Diminishing Marginal Utility Links to an external site., 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 comparable 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. 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. Using the visual below. Marginal Utility-Diminished Marginal Utility- The bottom graph shows that each additional item give you less utility than the previous. The Marginal Utility reaches zero, and then goes negative. Total Utility-Top Graph- Each unit of Marginal Utility is added to the previous, collecting Total Utility. Total Utility reaches its maximum where Marginal Utility reaches zero(0). Total Utility will decrease if the consumer continues consumption where Marginal Utility is negative. Review the first two videos (1.5 speed as needed) as well as the two linked above-for more explanation of Marginal Utility. Diminished Marginal Utility in one minute Diminished Marginal Utility Water Diamond Paradox Discussion Question: Using your knowledge of Marginal Utility and rationale behavior, why do you think that water may be of more value than diamonds? According to the Water - Diamond Paradox can the utility of an item change? Explain. Discussion Question Requirements: Each student is required to post a 150 word response to the question. The student then must post at least a 50 word response to at lease ONE other student post. Post-=4 points. Comment = 2 Points Submit Original Post by the Due Date. Comments are open for four (4) days after the Due Date or until the Available Until Date