MarginalVs Total Utility
MarginalVs Total Utility
Utilitymaximization is the guiding concept that influences the choices thatconsumers make in the market. Every player in the market is assumedto be a rational consumer and therefore it makes sense to concludethat individuals are generally motivated to buy the goods that confermore utility (most satisfying), and make decisions that is best forthem at a given time, that does more good than harm, and thatgenerally improves their well-being and standard of living (Stigler,2010).
Marginalutility is more useful than total utility in decision making becauseit denotes the additional satisfaction that is derived from everyadditional unit consumed (Stigler,2010).As more of a given good is consumed the satisfaction derived fromeach extra unit decrease in line with the law of diminishing marginalutility (Lee,2011).Total utility is the summation of the marginal utility and hence evenif all commodities were free the amount that every individual wouldconsume would be dictated by the law of diminishing marginal utility.Provided that the marginal utility remains positive, the totalutility will continue to increase, even though at a decreasing rate(Stigler,2010).
Whenmaking purchase decision consumers compare the marginal utilityattained by the prevailing price in the market. The diamond-waterparadox is a succinct illustration that the marginal utility perdollar spent is not a more accurate view than marginal utility(Greene& Baron, 2001).Although the total utility derived from consuming water that ischeaper than diamond is very large, the marginal utility of everyadditional cup or gallon is relatively low. Only a limited amount ofdiamond can be bought, and their marginal utility is very high(Greene& Baron, 2001).Although, the total utility attained from consuming water is muchhigher than that of diamond, the marginal utility of a cup or literof water is lower than that of diamond (Greene& Baron, 2001).In this light, the marginal utility is the key element thatdetermines the demand curve and the willingness of every consumer topay for a commodity or service.
Greene,J., & Baron, J. (2001). Intuitions about declining marginalutility. Journalof Behavioral Decision Making,14,243-255.
Lee,D.R. (2011). Happiness, Adaptation, and Decreasing Marginal Utility ofIncome. TheJournal of Private Enterprise, 27 (1):63-73.
Stigler,G.J.(2010).TheDevelopment Of Utility Theory. TheJournal of Political Economy,vol,58(4):307-327