Difference Between Total and Marginal Utility

Edited by Diffzy | Updated on: June 06, 2023

       

Difference Between Total and Marginal Utility

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Introduction

The utility received from a product determines consumer demand for it. Utility in the context of a product refers to a commodity's ability to meet consumer desires. From the consumer's perspective, it is a psychological sensation of fulfilment or pleasure, which differs from person to person, acquired by the consumer upon the use of the commodity or service. In economics, there are two forms of utility specified: total utility and marginal utility. It is used in the marketplace to examine customer preferences.

Total vs Marginal Utility

The primary distinction between total and marginal utility is that total utility represents the total fulfilment received by the consumer from consuming various units of a commodity, whereas marginal utility denotes the additional utility derived from the intake of an additional unit of a commodity.

Difference Between Total and Marginal Utility in Tabular Form

  • whole Utility refers to the whole benefit derived by a person from the consumption of commodities and services. The amount of benefit gained from consuming each consecutive unit of a commodity is referred to as marginal utility.
  • In general, when more of a commodity is used, the total utility grows. In contrast, the marginal usefulness of a commodity diminishes with every additional unit consumed.

When a consumer reaches an equilibrium level of satisfaction, he or she no longer receives satisfaction from the consumption of the commodity. This demonstrates that declining returns reduce total utility. In contrast to marginal utility, which decreases with each extra unit of commodity consumed

BASIS OF COMPARISONTOTAL UTILITYMARGINAL UTILITY
MeaningTotal utility is the total amount of satisfaction gained by an individual from consuming a specific number of items. As a result, total utility is proportional to total consumption of products or services.The excess amount of benefit received from consuming an additional commodity or service is referred to as marginal utility.As a result, the marginal utility is proportional to the amount of new goods or services consumed.
Rate of IncreaseWith each incremental intake, total utility increases. As a result, the total utility cannot be negative.Marginal utility, on the other hand, decreases with each extra good or service used. As a result, the marginal utility can be zero or negative.
ResultTotal utility is harmed by diminishing returns. It indicates that after a particular level of saturation, using more of the good or service provides no enjoyment.In contrast, the marginal utility shows a decline in satisfaction from the initial consumption and continues to fall with each consecutive consumption.

What Is Total Utility?

Total utility is the amount of fulfilment derived by a consumer from a certain product or service. It is used by economic analysts to analyze consumer choices in the marketplace. It should be noted that each consumer unit of a product or service has its marginal utility. As a result, the total utility merely represents the individual sum of all marginal utilities.

Total utility is essentially the maximum enjoyment that a consumer feels after interacting with a specific product or service throughout of its existence. Aside from demand theory and consumer theory, a consumer's behaviour is aimed towards utility maximization, in which a consumer strives to get the most possible satisfaction at the lowest possible cost.

Total Utility Maximization

Analysts who use traditional economic theory to analyse consumer behaviour believe that the ultimate objective of every consumer is to maximise utility at the lowest possible cost. The reason behind this is that people have limited finances, but they also want to get the most satisfaction out of their purchases of goods and services. So, total utility ensures that resources are maximised by assigning them to goods and services where marginal utilities equal each other. For example, if buying a higher amount of one item results in a lower marginal value than buying another item, it signifies that the marginal utility is going to be lower than if you bought the other item. To maximize utility, the marginal utility of the cash that you spend on a product or service should be equal to or greater than the marginal utility of the purchase you could have made.

The Law of Diminishing Marginal Utility

To effectively grasp total utility, you must first understand the law of diminishing marginal utility. According to the law, the more you consume a given product or service, the lower the additional satisfaction. It is important to keep in mind that the first product or service that you use will provide you with the highest marginal utility. The marginal utility is going to lower the second time you eat it, and so on. In other words, the utility of a product or service decreases with every extra piece purchased. For example, suppose you enjoy ice cream and decide to purchase some. The first scoop will provide the most delight. You'll still like another scoop, but it won't satisfy you as much this time. It reaches a point where you no longer desire it, implying that you have no desire to eat it. In general, the marginal utility of whatever commodity or service you choose, including money, decreases. For example, even if you wish to amass riches, every dollar you acquire grows less valuable by the day. The reason for this is that the marginal utility of what money can purchase is decreasing. As a result, to maximize total utility, consumers will always seek various combinations of items and services.

Importance of Total Utility in Market Demand

Total utility is an important factor when assessing market demand. The overall demand for a thing tends to rise as more consumers enhance their total utility by using that commodity. Market demand is driven not just by a good's price, but additionally by consumers' total utility and willingness to pay for the satisfaction it provides.

Example

For a box of ice cream scoops, the total utility increases with each extra scoop consumed. In this situation, the total utility is going to be the number of scoops consumed times by the number of scoops.

What Is Marginal Utility?

The advantage, pleasure, or satisfaction derived from using an additional product is referred to as marginal utility. According to the principle, an individual's gain from acquiring a new product is inversely proportional to the number of units he or she already has. As a result, in the situation of marginal utility, pleasure or benefit decreases with every extra consumption.

An identical example of a package of ice cream scoops can be used to demonstrate the concept. An individual's enjoyment from the initial ice cream scoop will be the greatest since he must be anxious to swallow the scoop.

However, the second scoop will be less satisfying than the first. This will continue until the pleasure level for a particular ice cream scoop reaches zero. If more scoops are consumed, the marginal utility of eating becomes negative.

Through the notion of the paradox of value, marginal utility is also tied to demand and supply.

History of Marginal Utility

Economists created the notion of marginal utility to clarify the economic reality of price, which they felt was driven by a product's utility. Adam Smith, an 18th-century economist, explored "the paradox of water and diamonds." Water, despite being essential to human life, has significantly less worth than diamonds, according to this contradiction.

This difference piqued the interest of economists and philosophers all around the world. Three economists, William Stanley Jevons, Carl Menger, and Leon Walras, independently concluded in the 1870s that marginal utility was the solution to the water and diamonds paradox. Jevons demonstrated in his book, The Theory of Political Economy, that financial choices are made according to "final" (marginal) utility rather than overall utility.

Types of Marginal Utility

There are various types of marginal utility. The following are three of the most common:

Marginal Utility is Positive

When having more of something provides you with more happiness, you have a positive marginal utility. Assume you enjoy eating a slice of cake, but another slice would bring you even more joy. Then your marginal utility from cake consumption is positive.

There is no marginal utility

When there is no additional measure of satisfaction from eating more of an item, the marginal utility is zero. For example, you may feel reasonably full of two slices of cake but not significantly better after a third slice. Your marginal utility from having cake is 0 in this situation.

Marginal Utility Is Negative

When you have too much of something, eating more is harmful. This is known as negative marginal utility. After eating three pieces of cake, the fourth slice of cake may potentially make you sick.

How to Calculate Marginal Utility

Marginal utility is also referred to as "marginal satiety." It can be stated as follows:                                  

Where MU is the marginal utility,

 TUx is the change in total utility, and

Qx is the change in the amount consumed by one unit.

Application of Marginal Utility

Governments, businesses, and consumers all use marginal utility to make economic decisions.

Consumers

Customers prefer products with a higher marginal utility. They are more likely to buy more because their satisfaction increases with each new item purchased. They are also more inclined to purchase comparable goods from the same brand, anticipating a similarly high degree of marginal value.

Higher marginal utility frequently results in higher customer satisfaction since customers believe they get their money's value. This may give rise to brand loyalty and word-of-mouth recommendations over time.

Businesses

Products with a higher level of satisfaction throughout the years and after the first use have a higher level of marginal utility. This increases their value to clients, allowing them to be priced more for bigger profits. This can also be used by businesses to help them generate better products and boost consumer satisfaction by concentrating on products with higher marginal utility.

Businesses can use marginal utility to help them decide which goods to improve or upgrade. When an item or service that already has an adequate amount of marginal utility is upgraded, it becomes even more valuable, allowing businesses to continue raising the price as time passes or for newer models. For example, if a car manufacturer currently has a popular SUV, they might build trim levels with additional amenities or enhancements. Customers are more inclined to pay the higher price for an even more premium edition because the original version is currently popular and has a high marginal utility.

Governments

Progressive taxation is frequently justified by the rule of diminishing marginal utility. Higher taxes, the theory goes, result in a decrease in utility for somebody with a higher income. Money provides diminishing marginal benefits to everyone in this instance. Assume the government needs to raise $10,000 from each individual to cover its expenses. If the average salary is $60,000 before taxes, the average person would earn $50,000 after taxes and live comfortably.

However, for anyone earning less than $10,000 to give over everything to the government is unjust and would necessitate a significantly bigger sacrifice. This is why poll taxes, which require anyone to pay the same amount, are generally unpopular.

Furthermore, a flat tax with no individual exemptions that obliged everybody to pay the identical amount would disproportionately affect those with lower incomes due to marginal utility. A 33% tax would push someone earning $15,000 per year into poverty, while someone earning $60,000 would remain with roughly $40,000.

Main Differences Between Total and Marginal Utility in Points

The following points explain the considerable discrepancies between total and marginal utility:

  • The overall benefit gained by a person from the use of commodities and services is referred to as total utility. Marginal utility is the amount of benefit derived from consuming each successive unit of a commodity.
  • In general, when more of a commodity is used, its total utility increases. In contrast, a commodity's marginal utility decreases with each additional unit used
  • When a customer reaches an equilibrium level of satisfaction, the consumption of the commodity no longer provides satisfaction. As a result, diminishing returns reduce total utility. Unlike marginal utility, which falls with each additional unit of commodity consumed.

Conclusion

Total utility and marginal utility are both essential notions in economics that are used in other disciplines of research. Utility theories are crucial for businesses and stakeholders because they project customer choice. It would be difficult to determine and map customer behaviour without knowledge of utility.

The study of total and marginal utilities, as well as their disparities, leads to the concept of demand and supply of products and services in a particular market. As a result, businesses and society must pay attention to those two economic themes to comprehend market trends and use them to their advantage.


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"Difference Between Total and Marginal Utility." Diffzy.com, 2024. Mon. 17 Jun. 2024. <https://www.diffzy.com/article/difference-between-total-and-marginal-utility>.



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