CONCEPT OF TOTAL UTILITY AND MARGINAL UTILITY

 

 Learning Contents:                                                            

·         Concept of Total Utility

·         Concept of Marginal Utility & its types

·         Relationship between Total and Marginal Utility

Total Utility (TU)

If the utility is cardinal and measurable, the total utility is defined as the sum total of utility (satisfaction) derived from the consumption of all the units of a commodity. In mathematical terms, Total utility is the direct function of the number of units of a commodity. In simple words, more of the units of a commodity is consumed; more will be the total utility. It can be written as,

TUx=f(x)

TU= Total utility of a commodity ‘x’

f=Function

x= quantity of ‘x’commodity consumed.

Again, the total utility can also be expressed with the help of marginal utility. It is the summation of all the marginal utilities, i.e.

TU

OR

TU= MU1+ MU2+ MU3+MU4………+MUn

E.g. if a person can only consume three slices of bread and the first slice of bread consumed yields 10 utils, the second slice of bread consumed yields 8 utils, and the third slice yields 2 utils, the total utility of bread would be 20 utils.

TU=10 utils+8 utils+2 utils = 20 utils (or 20 units of utility)

Marginal Utility (MU)

Marginal utility is defined as the additional utility gained from the consumption of one additional unit of a good or service. Marginal utility is the additional utility provided by one additional unit of consumption. In other words, an additional utility is gained from the consumption of an additional unit of a commodity.

Using the above bread example, slice 1 = 10 utils, slice 2 = 8, and slice 3 =2. If we consume the third slice, the total utility increases from 18 to 20 utils. The additional 2 utils from the third (the last) slice of bread is the MU.

MUnth=TUn- TUn-1  

[Marginal utility of nth unit of a commodity

               = Total utility from n units-Total utility from (n-1) units]

 

Again, in another way it can be written as

  

Types of Marginal Utility

Positive Marginal Utility: When total utility increases with increase in the consumption of additional unit of a commodity then, Marginal utility is positive

Zero Marginal Utility: When total utility remains constant with increase in the consumption of additional unit of a commodity then, Marginal utility is zero.

Negative Marginal Utility: When total utility decreases with increase in the consumption of additional unit of a commodity then, Marginal utility is negative.

Table 1 explains the relationship between TU and MU

Quantity

Consumed

(Units)

Total

Utility

(TU)

Marginal

Utility

(MU)

     

Analysis

0

0 utils

……

………………..

1

7 utils

7 utils

Initial and Positive  Marginal Utility

2

12 utils

5utils

Positive  Marginal Utility

3

15 utils

3utils

Positive  Marginal Utility

4

16 utils

1utils

Positive  Marginal Utility

5

16 utils

0 utils

Zero Marginal Utility

6

15 utils

-1 utils

Negative Marginal Utility

7

12 utils

-3 utils

Negative Marginal Utility


Diagrammatic Illustration of the relation between TU and MU

In Diagram 1, Quantity consumed is shown on X-axis and Utility is shown on Y-axis TU is the total utility curve and MU is the Marginal utility curve. The diagram showing the relation between TU and MU is drawn on the basis of the data shown in the table. It shows the following observations.

1.  TU continues to rise at a diminishing rate as long as MU is positive. It happens up to 5 units of consumption.

2.  TU is maximum when MU=0. It happens when exactly 5 units of the commodity are consumed.

3.  TU starts declining when MU is negative. It happens after 5 units of consumption.

4.      Decreasing MU implies that TU is increasing at decreasing rate.




Relationship between TU and MU

·         As more and more units of a commodity are consumed, MU from the consumption of each successive unit tends to diminish. It may even become zero or negative.

·         TU increases as long as MU is positive.

·         TU is maximum when MU is zero.

·         TU starts declining when MU is negative.

·         Decreasing MU implies that TU increases at a diminishing rate (MU is the rate of TU)

 

     Multiple Choice Questions based on Utility Analysis.

 1. Negative utility from a given unit of a commodity means that

      a. Consumer doesn’t expect to get any satisfaction from the consumption of this unit.

b. The consumer expects to get some lower level of satisfaction from the consumption of this unit.

c. The consumer would consume this unit of the commodity even if he has not to pay any price for this commodity

d. The consumer would not like to consume this unit of the commodity even if he has not to pay any price for this commodity.

   2.  At what point does total utility starts diminishing?

       a. When marginal utility is negative

       b. When marginal utility remains constant

       c. When marginal utility is increasing

       d. When marginal utility is zero

   3. What is called the point of satiety?

       a. The point where marginal utility becomes less than zero.

       b. The point where marginal utility becomes greater than zero.

       c. The point where marginal utility becomes zero

       d. None of these

   4. MU1+ MU2+ MU3+MU4………+MUn represents

       a. Total utility of a commodity

       b. Total marginal utility

       c. Total average utility

       d. None of the above

   5. Marginal Utility

       a. is always positive

       b. is always negative

       c. can be positive or negative but not zero

      d. can be positive or negative or zero

6. When marginal utility is zero what happens to total utility?

     a. become zero

     b. become maximum

     c. become minimum

     d. None of these

7. When total utility declines, then marginal utility

    a. Declines

    b. Increases

    c. Become zero 

    d. become negative

8. When MU is positive, then TU

    a. decreases

    b. is highest

    c. remains constant

    d. increases

9. Once the point of satiety is attained, consumption of additional units of the commodity causes

    a. Both TU and MU increase

    b. TU falls and MU increase

    c. TU falls and MU falls and becomes negative

    d. TU becomes negative and MU falls

 10. The total utility coincides with the marginal utility :

    a. For the first unit consumed.

    b. Only for the irrational consumer.

    c. At the level of the last unit consumed.

    d. At the saturation point.

Answers: 

1. d 2. a. 3. c. 4. a 5.d. 6.b. 7.d 8.d 9.c 10. d




Comments

Post a Comment

Popular posts from this blog

SHIFTS & ROTATIONS IN PRODUCTION POSSIBILITY CURVE

Image
    Learning Contents:                                                                Shifts   in   PPC  Rotations in PPC Change in Production Possibility Curve (Shifting/Rotation) The change in the Production Possibility curve can be of two types:  Shift in PPC: PPC will shift when there is a change in productive capacity (resources or technology) with respect to both the goods. Rotation of PPC: PPC will rotate when there is a change in productive capacity (resources or technology) with respect to only one good. Shifts in PPC:   The shift in PPC can either be rightward or backward. These shifts bring about a change in the production of both goods in an economy. The shifts in PPC are of two types: Rightward shift in PPC: Rightward shift in PPC occurs when the resources are increased or technology is improved for the production of both goods that means we can produce more of both the goods. Accordingly, PPC shifts to the right from Initial PPC (AB) to Final PPC (CD).   Re
Read more »500

Income Elasticity: Luxury Goods, Necessity Goods, and Inferior Goods.

Image
  Learning Contents:                                                               ·         Understanding Income Elasticity with respect of luxury goods, necessity goods and inferior goods. The demand for a commodity not only depends on the price of a commodity but also the income level of the consumer. It is a general understanding that a consumer usually prefers to spend more when his income rises and less when his income falls. Sometimes, we might also experience a fall in the demand of certain goods and services even when income rises. Therefore, income elasticity varies with respect to different types of goods and services. The income elasticity measures the percentage change in quantity demanded as a result of percentage change in the income of the consumer. The formula of income elasticity of demand is, The income elasticity measures the demand’s sensitivity or responsiveness to the change in income.   In simple words, it measures to what extent demand changes as a result o
Read more »500

Introduction to Elasticity of Demand

Image
Learning Contents: ·          Concept of Demand and Elasticity of Demand ·          Various Concepts of Elasticity of Demand ·          Concept of Elastic and   Inelastic Demand   Concept of Demand and Elasticity of Demand The Law of demand explains that, keeping other factors constant, demand for a commodity is inversely related to its price. In other words, if the price for a commodity rises, the quantity demand decreases. On the other hand, if price falls, quantity demand increases. Therefore, the concept of demand focuses on the direction of change i.e. how demand changes due to a change in price. In simple words, it explains that demand either increases or decreases as a result of a change in price but it overlooks an important aspect i.e. degree of change in demand i.e. How much or to what extent demand changes due to change in price? The degree of change is explained by the elasticity of demand. Therefore,
Read more »500