Total Utility And Marginal Utility

People buy goods because they get satisfaction from them. This satisfaction which
the consumer experiences when he consumes a good, when measured as number of
utils is called utility.

Total Utility (TU):
"Total utility is the total satisfaction obtained from all units of a particular commodity
consumed over a period of time".
For example, a person consumes eggs and gains 50 utils of total utility. This total
utility is the sum of utilities from the successive units (30 utils from the first egg, 15
utils from the second and 5 utils from the third egg).
Summing up total utility is the amount of satisfaction (utility) obtained from
consuming a particular quantity of a good or service within a given time period. It is
the sum of marginal utilities of each successive unit of consumption.

Marginal Utility (MU):
"Marginal utility means an additional or incremental utility. Marginal utility is the
change in the total utility that results from unit one unit change in consumption of
the commodity within a given period of time".
For example, when a person increases the consumption of eggs from one egg to two
eggs, the total utility increases from 30 utils to 45 utils. The marginal utility here
would be 15 utils (45utils -30utils).
Marginal utility, thus, can also be described as difference between total utility
derived from one level of consumption and total utility derived from another level of
consumption.
It may here be noted that as a person consumes more and more units of a
commodity, the marginal utility of the additional units begins to diminish but the
total utility goes on increasing at a diminishing rate.
When the marginal utility comes to zero or we say the point of satiety is reached,
the total utility is the maximum. If consumption is increased further from this point
of satiety, the marginal utility becomes negative and total utility begins to diminish.





LAW OF DIMINISHING MARGINAL UTILITY
A principle stating that as the quantity of a good consumed increases, eventually
each additional unit of the good provides less additional utility--that is, marginal
utility decreases. Each subsequent unit of a good is valued less than the previous
one. The law of diminishing marginal utility helps to explain the negative slope of the
demand curve and the law of demand. The law of diminishing marginal utility means
that the value of a good, the extra utility derived from a good, declines as more of
the good is consumed.

Importance of the law of diminishing marginal utility:
1. Basis of economic laws:
Various laws of economics are derived on the basis of marginal utility. For
example law of demand, law of substitution, concept of consumers surplus, etc.
2. Importance to the finance minister:
This law helps finance minister to formulate fiscal policy. Finance minister impose
high tax to the rich people and low tax to the poor people on the basis of the
law.
3. Importance to consumer:
This law is useful to consumer because by consuming the more units of
commodity, satisfaction starts to decline. On the basis of this law consumer
spends his/her money to purchase suitable quantity of commodity which
maximizes his/her satisfaction.
4. Useful to the government:
This law is useful for the government to reduce the unequal distribution of
wealth because marginal utility of wealth for poor is high and for rich is low. So
to maintain M.U of wealth government imposes the progressive tax (i.e. high tax
to rich and low tax to poor).
5. Price determination / Importance to monopolist:
This law is useful to determine the price. Basically price of commodity depends
on utility so if seller wants to sell more quantity he must reduce the price or for
more quantity to sell a unit price is low.
Importance of the law of diminishing marginal utility
Value Determination
The law of diminishing marginal utility is helpful to determine the value or price of a
commodity. For example, the law explains that the marginal utility of a commodity
decreases as the quantity of it increases. When the marginal utility falls, consumers
do not prefer to pay high price. Therefore, the seller has to reduce the price of the
commodity, if he or she wants to sell more. In this way, the law plays a crucial role
in determining price of a commodity.
Basis for Progressive Taxation / Importance to the finance minister
The law of diminishing marginal utility is one of the fundamental principles in public
finance. The law of diminishing marginal utility is crucial in determining peoples
ability to pay. The marginal utility of money for a poor person is higher than that for
a rich person. This is so, because a poor person possesses little money; therefore,
the utility derived from each unit of money is huge. This implies that rich people are
able to pay more as taxes than poor people are. This concept leads to progressive
taxation system, which imposes heavier tax burden on the rich. This is one of the
very important practical applications of the law of diminishing marginal utility.
Basis of economic laws
The law of diminishing marginal utility is the basic law of economics. It provides the
foundation for various laws of consumption. The law of demand is the outcome of
the law of diminishing marginal utility. The law of demand states that larger
quantities are purchased at a lower price. The reason is that as more units of a
commodity are purchased its marginal utility to the consumer becomes less and less
and so he gives lesser importance to additional units of a commodity. Therefore, he
will buy additional units of a commodity only at a lower price.
Paradox of value / Water Diamond Paradox
The principle of diminishing marginal utility is beneficial to understand the difference
between value-in-use and value-in-exchange. For instance, let us consider two
commodities water and diamond. Water is essential for our survival (value-in-use)
but it is not costly (no or little value-in-exchange). On the contrary, diamonds are
useful just for showy purpose (no value-in-use) but they are very costly (high value-
in-exchange).
Water is abundant and hence has no marginal utility. Because of this reason, water
has no or little value-in-exchange. On the contrary, diamonds are scarce and hence
possess a very high marginal utility. Therefore, diamonds have high value-in-
exchange. In this way, the law of diminishing marginal utility tells us why diamonds
are highly priced when compared to water. This scenario is often referred to as
water - diamond paradox

Importance to consumers:
A consumer in order to get maximum satisfaction from his relatively scarce resources
distributes his income on commodities and services in such a way that the marginal
utility from all the uses are the same. Here again the concept of marginal utility
helps the consumer in arranging his scale of preferences for the commodities and
services.
Explanation of the Law of Diminishing Marginal Utility
Suppose that you are hungry and plan to have some oranges. Since you are hungry, the first orange provides
you with great amount of utility. The utility derived from the second orange is certainly less than that of the first
orange. Similarly, the utility derived from the third orange is less than that of the second orange; the fourth orange
yields you less utility than the third orange and so on. After certain stage of consumption, the utility derived
becomes zero and beyond this stage, the utility derived becomes negative. This is because of the reason that
you are getting satiated as you consume more and more oranges.
When the utility becomes zero, it means that the consumer is not in need of the commodity any further. For better
understanding, let us look at the following table. The figures mentioned in the table are hypothetical and the table
represents the utility derived by a person from the consumption of oranges.
Table 1
Number of
Oranges
Total Utility Marginal Utility
1 6 6
2 11 5
3 15 4
4 18 3
5 20 2
6 21 1
7 21 0
8 20 -1
Total utility
Total utility, as the term indicates, is the utility derived from all units of commodity. Suppose that a person
consumes 10 oranges. In this case, the total utility is obtained by adding the utility derived from each unit of
orange. In our example (Table 1), the total utility derived from the first six oranges is 21 (21 = 6 + 5 + 4 + 3 + 2 +
1).
Marginal utility
Marginal utility is the utility from a successive unit of commodity. To put it simple, marginal utility represents the
utility derived from each unit of commodity under consideration.
Symbolically,
MU =TU/C where,
TU = total utility
TU = change in total utility (TUn TUn-1)
in other words, marginal utility of n
th
unit of commodity A is the difference between the total utility of n
th
unit and
the total utility of (n-1)
th
unit of the commodity.
Symbolically,
MUn = TUn TUn-1

The figure 1 details the path of total utility and marginal utility curves. The total utility curve rises initially and after
certain stage, the curve starts declining. At this stage, the marginal utility curve enters into the negative zone.

Table 2: Relationship between Marginal Utility and Total Utility
Marginal Utility Total Utility
1. Declines
1. Increases but at a
diminishing rate
2. Reaches zero; and 2. Reaches maximum; and
3. Becomes Negative 3. Declines from the maximum
The law claims that the marginal utility diminishes as quantity consumed increases. In some cases, the marginal
utility may keep increasing in the beginning. However, a stage certainly comes at which the marginal utility starts
decreasing. The law is relevant only at this decreasing part.