- Economists
use the term utility to refer to the expected pleasure, or
satisfaction, obtained from consuming goods and services. There is
an important distinction between total utility and marginal utility.
Total utility refers to the amount of satisfaction obtained
from your entire consumption of the product. By contrast, marginal
utility refers to the amount of satisfaction you get from consuming
the last (i.e., marginal) unit of a product. That is:
- Marginal
Utility (MU) = change in total utility/change in quantity
- The
concepts of total and marginal utility explain not only why we buy
popcorn at the movies but also why we stop eating it at some point.
Even people who love popcorn (i.e., derive great total utility from
it) do not eat endless quantities of it. Why? As a rule, the amount
of additional utility (i.e., marginal utility) that we obtain from
a product declines as we continue to consume it. This phenomenon of
diminishing marginal utility is so nearly universal that economists
have come up with a law around it. This law of diminishing marginal
utility states that each successive unit of a good consumed yields
less additional utility. This is one of the fundamental pillars
of the law of demand.
- The
more marginal utility a product delivers, the more a consumer will
be willing to pay for it. With given incomes, tastes, expectations,
and prices of other goods and services, people are willing to buy
additional quantities of a good only if its price falls. As the marginal
utility of a good diminishes, so does our willingness to pay. This
law of demand is illustrated by the downward-sloping demand curve.
- The
law of demand and the law of diminishing marginal utility tell us
nothing about why we crave popcorn or why our cravings subside. Those
explanations are reserved for psychiatrists, sociologists, and psychologists.
The laws of economics simply describe our market behavior.
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