Question

The utility of a good is the power of the good to satisfy a want.

Short answer

Short Answer: Utility is the satisfaction or benefit that a person receives from consuming a good or service, and it is related to how effectively it meets their wants and desires. Total utility reflects the overall satisfaction from consuming a certain quantity, while marginal utility reflects the additional satisfaction from consuming one more unit. Utility is measured in utils, but the actual value may differ between individuals. The law of diminishing marginal utility states that the additional satisfaction from consuming each additional unit decreases as consumption increases. In the apple consumption example, the utility of apples is related to their ability to satisfy the person's want, and the marginal utility decreases as more apples are consumed.

Step-by-step solution

Define utility

Utility is the satisfaction or benefit that a person receives from consuming a good or service. It is a measure of how effectively a good or service meets a consumer's wants and desires.

Types of utility

There are two main types of utility: total utility and marginal utility. Total utility: It is the overall satisfaction obtained from consuming a certain quantity of a good or service. Marginal utility: It is the additional satisfaction obtained from consuming one more unit of a good or service, keeping consumption of other goods constant.

Measuring utility

Utility is a subjective concept, so there is no exact way to measure it. However, economists often use utils to represent the satisfaction a person gets from consuming a good or service. One util represents one unit of satisfaction, but the actual value of a util might differ between individuals.

The law of diminishing marginal utility

The law of diminishing marginal utility states that as a person consumes more of a good or service, the additional satisfaction they receive from consuming each additional unit decreases. In other words, the margin utility of a good decreases as consumption increases.

Example to illustrate the utility of a good

Let's consider an example of apple consumption. Suppose a person is consuming apples, and their satisfaction is measured in utils. 1. The person consumes one apple and their total utility is 10 utils. 2. They consume a second apple, and their total utility increases to 18 utils. The marginal utility of the second apple is 8 utils (18 - 10 = 8). 3. They consume a third apple, and their total utility goes up to 24 utils. The marginal utility of the third apple is 6 utils (24 - 18 = 6). In this example, we can see that the utility of apples is related to the power of apples to satisfy the person's want. The more apples the person consumes, the less additional satisfaction they receive from consuming them, according to the law of diminishing marginal utility.

Key concepts

Total Utility

Imagine enjoying your favorite dish bite after bite; the contentment you feel from the first mouthful to the last sums up the essence of total utility in economics. Total utility represents the cumulative satisfaction a consumer gets from enjoying a particular quantity of a good or service. It answers a simple question: How much overall happiness do you derive from what you consume?

Marginal Utility

Now, consider the pleasure you get from each additional slice of pizza after the first. This extra bit of satisfaction is what economists call marginal utility. Marginal utility is the incremental bliss or usefulness gained from consuming one extra unit of a product, while keeping the consumption of other products constant. It helps in understanding the consumer's behavior for making decisions about how much more of an item to consume.

Law of Diminishing Marginal Utility

Ever noticed how the first bite of chocolate feels delightful, but by the tenth piece, you don't relish it as much? This phenomenon is described by the law of diminishing marginal utility, which asserts that as you consume more of a good or service, the satisfaction you gain from each new unit diminishes. In layman's terms, the more you have of something, the less you're going to enjoy each additional dose. This law explains why we don't just keep eating, drinking, or buying endlessly—it wouldn't make us proportionally happier.

Measurement of Utility

Whilst feelings and enjoyment are inherently personal and subjective, economists endeavor to quantify this satisfaction with the conception of 'utils'. Measurement of utility might seem akin to measuring joy or pain, which is admittedly quite abstract. Utils are the standard hypothetical units used to measure utility: one util equates to one unit of satisfaction. However, because utility is subjective, what might constitute a single util for one person could be entirely different for another. The idea is not to pinpoint an exact figure, but to compare and understand preferences and choices.