Stanford University Utility M

Topic 1: Utility Maximization

One of the main principles behind mainstream, neoclassical economic theory, is that individuals act to maximize their utility. Utility is generally defined as a satisfaction (pleasure) that an individual derives from consuming or using a specific good or service. Total utility indicates the total amount of satisfaction or pleasure an individual derives from consuming some specific quantity of a good or service. Marginal utility refers to the additional satisfaction a consumer gets from an additional unit of a good or service she/he consumes during a given period of time.

The law of diminishing marginal utility states that as an individual consumes more units of a specific good or service, the additional utility the consumer derives from the successive units diminishes over time. Thus diminishing marginal utility explains a lot about consumer behavior in the market economy.

  • Select a specific consumer behavior and construct a “mini case study” that highlights the workings of marginal utility and how it affects the consumption pattern for goods and services.
  • Explain the roles total utility and marginal utility play to understand change in the consumer’s behavior and preferences.
  • Does the law of diminishing marginal utility hold for all goods and services we buy and consume? What are the exceptions?

Do the discussion first add citation and references then do the response posted below

Posted 1

Marginal utility can be defined as the extra utility received from consuming one additional unit of a good, while keeping constant of all other goods (Alvino, Constantinides, & Franco, 2018). How much more enjoyment are you getting from one additional unit? There’s a saying among cyclists that says the right number of bikes to own is n+1 (where n is the number of bikes you currently own). It is exciting to buy another bike. Perhaps you usually mountain bike and you decide to buy a gravel bike. It’s fun to do and trying something similar but slightly different. Then you decide to buy a road bike. It is also fun and exciting, but your total time available to ride a bike hasn’t changed, so you ride each one less, and start to get less and less enjoyment out of it. At some point the number of bikes you own and ride reaches the point of diminishing utility, and the consumer no longer wants to purchase another bike.

Total utility is the full amount of satisfaction derived from the consumption of a product. Marginal utility is the change in satisfaction with the consumption of one additional unit of a good or service (McConnell, Brue, & Flynn, 2018). The higher the total utility, the more likely a consumer will purchase that good or service. The higher the marginal utility, the more likely a consumer with purchase another unit of that good or service. If the marginal utility is low or negative, there will be less demand for additional purchases.

The law of diminishing marginal utility can be applied to all situations so long as there is rational behaviour and budget constraint (McConnell, Brue, & Flynn, 2018). Any exceptions would fall into these categories. I would, however, volunteer to be a guinea pig in the experiment to test the point at which another unit of money does not give any additional satisfaction.

Posted 2

Consumers will dependably buy shampoo, conditioner, and other shower items as they are deemed necessary for hygiene purposes. If a consumer purchases multiple bottles at a time, they utility they receive with each bottle will greatly diminish because their need is much smaller. At some point, the consumer will even experience negative utility because they will have purchased more shampoo than they can reasonably use and will run out of room in their home. The marginal utility is also true when using these items. The first usage of shampoo will clean your hair, but every unit over the necessary amount will be excess and washed away and wasted.

Total utility and marginal utility coexist within each consumers’ capacity to enjoy a good or service. “Total utility is the total satisfaction received from consuming a given total quantity of a good or service, while marginal utility is the satisfaction gained from consuming an additional quantity of that item” (ThisMatter, n.d.). Utility is measured in individual units called “utils” and are subjective to each person. The total utility would be the highest possible satisfaction the consumer could receive from the first (total) item. As the consumer continues to consume, the law of diminishing marginal utility states that satisfaction will be less with the second item and will continue to diminish as consumption continues until the marginal utility drops to zero or even lower (McConnell, Brue, & Flynn, 2017).

When we begin thinking of this law as consumers, it can be easily applied to most things in our lives. We may think about how quickly children get tired of their new “favorite” cereal or how much less excited we are for the 5th new purse that month. However, there are items that consumers depend on either out of habit/addiction or necessity and when there is an increase or decrease in the quality of the good or service (McConnell, Brue, & Flynn, 2017). Items like tobacco, alcohol, and other drugs are addictive and therefore provide an unrealistic reality for the consumer and can lead to serious problems. Prescription medication and other daily use items would also be omitted from this law. This law also loses its value when things are not uniform/consistent., like when technology is updated.

Posted 3

Diminishing marginal utility can be seen in many areas with the most prominent example being food. I’d like to stray a bit away from that topic and focus instead of the marginal utility of bath towel size. Consider that you’ve just taken a shower and you need to dry off. You reach for the closest towel and it’s the size of a washcloth, maybe 6 inches square. You probably won’t be able to dry yourself fully with that towel, so the utility is less than the requirement. So, you reach for a larger towel which has more utility like a hand towel. You will still likely be damp when using that towel, so you reach for a standard bath towel. You will be dry and the towel will be able to dry out before you shower again. Now imagine a blanket-sized towel. You only use about half of that towel’s drying capacity and are left with a huge towel to try and dry. The marginal utility of the extra towel material is significantly less than the regular sized towel. Therefore, a normal consumer would usually buy the standard towel because it meets their needs and is reasonably priced and sized. The giant towel might be sold at some volume but it will likely be much less due to its utility.

The law of diminishing marginal utility does apply to all goods and services of sufficient supply. Certainly, to any individual, the law of diminishing marginal utility applies to all goods and services. No one person can infinitely benefit from consumption of anything. Some would say, “all things in moderation”. Even money or medicine lose their marginal utility after a certain amount of consumption is reached. That amount might not be achievable due to a finite supply of a good. But there would still be a theoretical point above which, there would be no remaining utility to be had.

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