Total Utility (Economics) - Explained - The Business Professor

Total utility refers to the amount of satisfaction that a consumer derives from a specific product or service. Economic analysts use it to ... Home Economics,Finance,&Analytics EconomicAnalysis&MonetaryPolicy TotalUtility(Economics)-Explained WhatisTotalUtility? WrittenbyJasonGordon UpdatedatApril24th,2022 ContactUs Ifyoustillhavequestionsorprefertogethelpdirectlyfromanagent,pleasesubmitarequest.We’llgetbacktoyouassoonaspossible. Pleasefilloutthecontactformbelowandwewillreplyassoonaspossible. 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Backto:ECONOMICANALYSIS&MONETARYPOLICY Howis TotalUtilityUsed? Totalutilityisbasicallythemaximumhappinessthataconsumerexperienceafterhavinganexperiencewithaparticularproductorservicethroughitslifespan.Besidesdemandtheoryandconsumertheory,theactionofaconsumerisdirectedtowardutilitymaximization,whereaconsumertriestoachievethebestpossiblesatisfactionatthemostreasonablecost.TotalUtilityMaximizationAnalystswhouseclassicaleconomictheorytoanalyzeconsumeractivitiesbelievethatthegoalofeveryconsumeristoattainthelargestutilityatthepossiblelowestcost.Thereasonisthatpeoplehavescarceresources,butatthesametime,haveadesiretoachievethepossiblemaximumsatisfactionfromtheconsumptionofproductsandservices.So,whattotalutilitydoesistoensurethatitmaximizesresourcesbyallocatingthemtoservicesorproducts,wheremarginalutilityequalseachother.Forinstance,ifpurchasingalargerquantityofoneitemresultsinsmallermarginalutilitythanwhenyouspentthemoneytoacquireanotheritem,itmeansthatthemarginalutilitywillbelesscomparedtopurchasingtheotheritem.Notethattomaximizeutility,themarginalutilityofthemoneyyouspentonaproductorservice,shouldbeequaltoorexceedthemarginalutilityofpurchasethatyoucouldhavemade.HowTotalUtilityWorks(Example)Letsassumethataconsumerhastwooptionsforpurchasingeithergoodsorservices.Thetwooptionspresentedtotheconsumerareofthesamecost,andatthesametime,noneoftheoptionsismorefunctionalornecessarythantheother.Insuchascenario,theconsumerwillchoosetheoptionthathasthemostutilityformoney.TheLawofDiminishingMarginalUtilityInordertounderstandbetterwhattotalutilityis,youfirsthavetolearnwhatthelawofdiminishingmarginalutilityis.Thelawstatesthatthemoreyouconsumeaparticularproductorservice,themoretheadditionalsatisfactiondrops.Notethatthefirstgoodorserviceyouconsumewillgiveyouthehighestmarginalutility.Thesecondtimeyouconsumeit,themarginalutilitywillbelesser,andsoon.Inotherwords,utilitydeclineswitheachadditionalunitofthesameproductorservice.Forexample,letsassumethatyoulikeicecreamandyoudecidetobuysome.Thefirstscoopyoueatwillyouthegreatestsatisfaction.Youwillstillenjoythesecondscoop,butthistimearound,itwillgiveyoulittlesatisfaction.Itreachesapointwhenyouwillnotdesireitanymore,meaningthatthedesiretoeatitwillbezero.Generally,thereisadeclineinmarginalutilityineveryproductorserviceyoudecidetohave,andthisincludesmoney.Forinstance,althoughyoumaywanttoaccumulatewealth,everydollaryouaccumulatebecomeslesseachday.Thereasonisthatthemarginalutilityofwhatmoneycanbuydeclines.So,forconsumerstoensurethattheymaximizetotalutility,theywillalwaysseektoattaindifferentmixturesofproductsaswellasservices.Sincetheyhavescarceresources,consumersusuallymakechoicesthatwillincreasetheirtotalutilitywitheveryextraunitofconsumption.OtherConsiderationsHowever,notethatalthoughusefulnessisoneoftheutilitydefinition,itisnotaqualityineconomicutility.Waterisagoodexample.Itisusefulbutdoesnothaveutilityforthemajorityofthepeople.Itisalsosubjective,andso,itvariesfromoneindividualtotheother.Inaddition,ithasacontinuousvariancethatisdependentonthequantityofconsumption,untilthatpointwhenyoucannotmeasureit.Theutilityisaheuristictool.Itgiveseconomistsanopportunitytoanalyzeandtalkaboutthesatisfactionlevelofaserviceorproduct.RelatedTopics TotalUtility(Economics) Marginalutility EfficiencyPrinciple DiminishingMarginalUtility ExpectedUtility SubjectiveTheoryofValue PositionalGoods MarketEconomy ConsumerGoods Consumption ScarceResources MarketEquilibrium SelfInterest EconomicEfficiencyExternality InvisibleHand OtherRelatedTopics SelfInterest TotalUtility(Economics) ConsumerSurplus Utilitarianism IndifferenceCurve TimePreferenceTheoryofInterest Incentives MarginalBenefit totalutility RelatedArticles GiffenGood-Explained GrossDomesticProduct(GDP)-Explained Balassa-SamuelsonEffect-Explained Fox-TrotEconomy-Explained Close Expand