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    as a consumer consumes more of a good or service, the additional satisfaction of consuming the additional units goes down. this is called the law of

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    get as a consumer consumes more of a good or service, the additional satisfaction of consuming the additional units goes down. this is called the law of from EN Bilgi.

    Lesson overview

    One of the questions that economists are interested in is how people decide to spend their money, a field of economics known as consumer theory. This study of how people decide to allocate their income to spending on goods has a few key assumptions that lead to some important conclusions about how a consumer will decide to allocate their income to spending on goods and services.

    Key assumptions about consumer motivation:

    A rational consumer is a utility maximizer. A consumer will seek to have as much benefit or satisfaction as possible. In economics, the term utility refers to the happiness, benefit or value a consumer gets from a good or service. In other words, consumers are not satisficers who will settle for "good enough". This happiness or satisfaction is measured in a unit called a util.

    Most goods provide diminishing marginal utility. According to the law of diminishing marginal utility, as the consumption of good increases the additional amount of happiness the good provides the consumer decreases. So while having three scoops of ice cream makes you happier than two scoops, the second scoop doesn't make you as happy as the first one did, and the third one doesn't make you as happy as the second one did.

    These assumptions lead us to several conclusions about how consumers go about deciding how to spend their money. Consumers will therefore consider

    the marginal utility of another unit of a good they are considering buying

    the prices of a good and alternative goods they are considering buying

    their budget for consuming goods and services

    Because consumers derive less satisfaction from consuming additional units of a good, they will only be willing to buy more of a particular good if the good's price decreases. In this way, the law of diminishing marginal utility helps explain the law of demand.

    Total utility

    If we consider how an individual experiences utility when consuming ice cream, we can make some important observations how total utility changes as the consumption of a good increases.

    To express utility, we will use a unit called the util, which is simply a measure of how happy someone is. For instance, we might say that the first scoop of ice cream provides Axel with

    7 7 7

    utils of happiness. The table below shows how Axel's utility changes as he consumes additional scoops of ice cream.

    Quantity consumed Total utility

    0 \enspace \text {scoops}

    0scoops

    0, start text, s, c, o, o, p, s, end text

    0 0 0 utils

    1 \enspace \text {scoop}

    1scoop

    1, start text, s, c, o, o, p, end text

    7 7 7 utils

    2 \enspace \text {scoops}

    2scoops

    2, start text, s, c, o, o, p, s, end text

    12 12 12 utils

    3 \enspace \text {scoops}

    3scoops

    3, start text, s, c, o, o, p, s, end text

    15 15 15 utils

    4 \enspace \text {scoops}

    4scoops

    4, start text, s, c, o, o, p, s, end text

    16 16 16 utils

    5 \enspace \text {scoops}

    5scoops

    5, start text, s, c, o, o, p, s, end text

    15 15 15 utils

    6 \enspace \text {scoops}

    6scoops

    6, start text, s, c, o, o, p, s, end text

    12 12 12 utils

    Notice that additional scoops provide Axel with more utility up until the

    4^{th} 4 th

    4, start superscript, t, h, end superscript

    scoop, at which point Axel's utility is maximized. Beyond

    4 4 4

    scoops we can see that Axel is actually experiencing less and less total happiness.

    Axel's total utility from ice cream can be graphed in a utility function, as seen in

    \text {Figure 1} Figure 1

    start text, F, i, g, u, r, e, space, 1, end text

    : \small{1} 1 \small{2} 2 \small{3} 3 \small{4} 4 \small{5} 5 \small{6} 6 \small{1} 1 \small{2} 2 \small{3} 3 \small{4} 4 \small{5} 5 \small{6} 6 \small{7} 7 \small{8} 8 \small{9} 9 \small{10} 10 \small{11} 11 \small{12} 12 \small{13} 13 \small{14} 14 \small{15} 15 \small{16} 16 \small{\llap{-}1} - 1 \small{\llap{-}2} - 2 \small{\llap{-}3} - 3 \text{Utils} Utils Q Q \text{TU} TU \text {Figure 1} Figure 1

    start text, F, i, g, u, r, e, space, 1, end text

    : Axel's total utility for ice cream

    Marginal utility

    If we look more closely at Axel's total utility we can observe how it changes as he consumes more ice cream. The change in a consumer's total utility when he consumes one additional unit is the marginal utility.

    Quantity consumed Total utility Marginal utility

    0 \enspace \text {scoops}

    0scoops

    0, start text, s, c, o, o, p, s, end text

    0 0 0 utils - − minus

    1 \enspace \text {scoop}

    1scoop

    1, start text, s, c, o, o, p, end text

    7 7 7

    Source : www.khanacademy.org

    ECON 150: Microeconomics

    Section 01: Consumer BehaviorUtility

    In this section, we are going to take a closer look at what is behind the demand curve and the behavior of consumers. How does a consumer decide to spend his/her income on the many different things that he/she wants, i.e., food, clothing, housing, entertainment? We assume that the goal of the consumer is to maximize his/her level of satisfaction or joy, constrained by his/her income.

    Economists use the term utility as a measure of satisfaction, joy, or happiness. How much satisfaction does a person gain from eating a pizza or watching a movie?  Measuring utility is based solely on the preferences of the individual and has nothing to do with the price of the good.  Let’s do an experiment in utility.

    Step 01: Get some of your favorite candy, pastries, or cookies.

    Step 02: Take a bite and evaluate, on a scale from 0 to 100 (with 100 being the greatest utility), the level of utility from that bite. Record the marginal utility of that bite (i.e., how much you get from that one additional bite).

    Step 03: Repeat step 02. It is important to be consistent with each unit consumed, i.e., the same size and no drinking milk or water part way though.  When you run out of candy or your marginal utility goes to zero you can stop.

    Law of Diminishing Marginal Utility

    The law of diminishing marginal utility states that as more of the good is consumed, the additional satisfaction from another bite will eventually decline. The marginal utility is the satisfaction gained from each additional bite. As more of the good is consumed, we gain less additional satisfaction from consuming another unit.  Thus even if a good were free and you could consume as much as you wanted, there would be a limit to the amount you would consume due to the law of diminishing marginal utility.

    Summing the marginal utilities gives us the total utility.  For example, let’s say the first chocolate was an 85 and the second chocolate had a marginal utility of 79, then the total utility from consuming two chocolates is 164. The total utility from consuming three chocolates is 85+79+73 = 237.  As long as our marginal utility is positive our total utility increases although with diminishing marginal utility it increases at a decreasing rate.

    Can marginal utility be negative? Yes. At a holiday dinner, you may overeat and suffer from indigestion afterwards to a point where you regret having eaten too much, but at the time of the dinner, you expected greater utility from eating the last of the meal. We would not willingly consume an item that gave us negative marginal utility.  Then why would an individual stuff themselves during a hot dog eating contest where clearly the last hot dogs consumed are making them worse off?  Although the marginal utility from the last hot dog itself makes the person worse off, the utility from winning the contest is greater making the marginal utility positive.

    The marginal utility of an item can change. For example, during a drought water provides a high positive marginal utility, and with more rain the marginal utility declines. At some point, there is too much rain, it turns from being a good utility to a bad one and the marginal utility of more rain,  when it is already flooding,  is negative.

    Maximizing Utility

    Utility values can be determined by an individual ranking his/her preferences from least preferred to most preferred.  The resulting ranking or utility values are subjective or individual.  They are also ordinal rather than cardinal.  Ordinal means that the utility values simply define a ranking of preferences rather than an actual cardinal measurement.

    Imagine a class has 10 students in the class and the teacher lined the students up according to height.  He then numbered them off according to height, assigning the shortest student a 1 and the tallest student a 10.  Is it true that student number 4 is twice tall as student number 2?  Of course not.  All we know from the ranking is that student number 4 is taller than student number 2.  Now, imagine that in another class another teacher has also ranked 10 students according to height.  Is it true that student number 10 from the second classroom is taller than student 1 from the first classroom?  We cannot say since the ranking is only valid within a particular course.  In order to say a student is twice as tall as another student or to be able to compare students between classes, we would need a cardinal measure of height like inches or centimeters.

    Since utility is ordinal and not cardinal we cannot make interpersonal comparisons of utility.  Does a rich person value a dollar more or less than a poor person?  While some would say that a poor person likely has more unmet needs and thus he would value the dollar more. The answer is that it all depends on the preferences of the individuals. A poor person may prefer to live a more simplistic life and place a lower value on having an extra dollar than a rich person who has a “love of money” (1 Timothy 6:10).  We simply cannot make such an interpersonal comparison of utility.

    Source : courses.byui.edu

    Diminishing Marginal Utility Principle & Examples

    Understand the definition of the law of diminishing marginal utility. Discover its relationship with total utility, and see real-world examples of...

    Business Courses / Course / Chapter

    Definition of Diminishing Marginal Utility with Examples

    Sarah Sagal, Wren Hawthorne

    Understand the definition of the law of diminishing marginal utility. Discover its relationship with total utility, and see real-world examples of the law in practice. Updated: 03/10/2022

    Table of Contents

    Law of Diminishing Marginal Utility: Definition

    Marginal Utility and Total Utility

    Law of Diminishing Marginal Utility Examples

    Lesson Summary Create an account

    Law of Diminishing Marginal Utility: Definition

    Utility is the satisfaction, value, or benefit gained from the consumption of a good or service. Marginal utility is the additional satisfaction gained when an additional unit of a good or service is consumed. Marginal utility is also known as marginal benefit, and it can also reference the highest amount a consumer is willing to pay for one more unit of a good or service.

    Marginal utility can be calculated by taking the change in total utility divided by the change in units consumed, thus giving you the additional utility gained from the consumption of an additional unit of that good or service. Marginal utility is typically the highest with the first unit consumed, and decreases with each additional unit, known as the principle of diminishing marginal utility. As a result, a graph of marginal utility is downward sloping.

    The law of diminishing marginal utility definition states that as a person consumes more of a good or a service, the marginal utility from each additional unit of that good or services declines. This law can apply to consumption of the same goods or services or of different goods or services. It is helpful to understand this concept when it comes to analyzing issues with the traditional supply and demand model.

    For example, when talking about eating cookies, enjoying the first cookie will bring much more satisfaction than the second cookie. As the person eats more cookies, their marginal utility will continue to decrease until it hits zero and crosses into negative utility. At this point, eating another cookie would make the person feel sick and bring them less satisfaction.

    However, this concept also applies when it comes to choosing between different goods and services. Say a person just got back from running, and they are both sweaty and thirsty. If they are more thirsty than sweaty, they will drink water before heading to the shower. The marginal utility of a bottle of water is higher than that of a shower, in this case, since the drink of water brings the consumer more satisfaction than a shower.

    Another application of the law to different goods and services is grocery shopping. A consumer may discover a new frozen entree that they love, and they purchase seven entrees to eat each evening that week. The first night they eat the entree, their marginal utility is very high. By the fifth night, it does not make them any more or less satisfied. By the time they get back to the grocery store the following week, they are tired of eating that entree and will not purchase it again since it now brings them negative utility. Instead, they will pick another entree to purchase.

    The law of diminishing marginal returns works because consumers have limited budgets and preferences for what they want. When it comes time to choose what items a consumer wishes to purchase within their budget constraints, their preferences for each item and its respective cost are considered; their self-interest takes priority, not the interest of the business. If a person loves chocolate bars, buying only chocolate bars with their entire budget does not make logical sense and would not maximize their utility. It is simply human nature that as more of a good is consumed, it becomes less rare or special to us. However, buying a combination of chocolate bars, chicken, and broccoli might allow the consumer to achieve a higher utility.

    The marginal utility for a good or service varies by consumer and type of good or service. In theory, each consumer will purchase the exact right combination of goods and services that will maximize their utility. However, in practice, humans are less rational and less focused on maximizing utility. This is one major criticism of the concept, but, nonetheless, information on marginal utility provides guidance to marketers and business strategists.

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    Marginal Utility and Total Utility

    Total utility is the total satisfaction, value, or benefits gained from all units consumed of a good or service. Total utility (TU) can be found by adding each of the marginal utilities for each item consumed. The law of diminishing marginal utility applies here as well - as the number of units consumed increases, the total utility increases, but at a slower pace as marginal utility decreases. When marginal utility is equal to 0, total utility is at its highest point. As marginal utility crosses into negative values, total utility begins to decrease. The graph below illustrates this relationship.

    Graphic Representation of the Relationship Between Marginal and Total Utility

    Source : study.com

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