Definition of Total Utility in Economics, With Example

Total utility is the aggregate summation of satisfaction or fulfillment that a ... Rational Choice Theory says that consumers seek to maximize their utility ... TableofContents Expand TableofContents WhatIsTotalUtility? UnderstandingTotalUtility RationalChoiceTheory TheLawofDiminishingMarginalUtility HowtoCalculateTotalUtility TotalUtilityMaximization ExampleofTotalUtility TotalUtilityFAQs TheBottomLine Economy Economics WhatIsTotalUtility? Totalutilityistheaggregateamountofsatisfactionorfulfillmentthataconsumerreceivesthroughtheconsumptionofaspecificgoodorservice.Totalutilityisoftencomparedtomarginalutility,whichisthesatisfactionaconsumerreceivesfromconsumingoneadditionalunitofagoodorservice.Totalutilityhelpseconomistsunderstandthedemandforgoodsandservices. KeyTakeaways Totalutilityistheaggregatesummationofsatisfactionorfulfillmentthataconsumerreceivesthroughtheconsumptionofgoodsorservices.Economistsseektoquantifyutilityandtotalutilityusingutils.Tobestunderstandtotalutility,oneshouldunderstandtheLawofDiminishingMarginalUtility,whichstatesthatasmoreofasinglegoodorserviceisconsumed,theadditionalsatisfaction,referredtoasmarginalutility,drops.Totalutilityisacoreconceptstudiedwhenseekingtoanalyzeconsumerbehaviors.Ingeneral,economictheoriesbelievethatconsumeractionsareusuallybasedonthegoaloftotalutilitymaximization,whichleadstopurchasingunitsperceivedtohavethegreatestutilitysatisfaction. UnderstandingTotalUtility Ineconomics,utilityreferstothesatisfactiongainedfromconsumingagoodorservice.Totalutilityisusuallydefinedasaquantifiablesummationofsatisfactionorhappinessobtainedfromconsumingmultipleunitsofaparticulargoodorservice. Utilityandtotalutilityareusedintheeconomicanalysisofconsumerbehaviorswithinamarketplace.Economistsseektoquantifytotalutilityusingspecialcalculations.Economistsmayalsostudyseveraleconomicmetricsinconjunctionwithtotalutilitywhenseekingtounderstandhowconsumerbehaviorsalignwithsupplyanddemand. Ineconomics,economiststypicallyviewchangesinbehaviorandconsumptionbyanalyzingmarginalincreasesandmarginaldecreases.Marginalchangeswillusuallybeeitherscaledincreasesorscaleddecreases.Inthecaseoftotalutility,marginalreferstotheincreasingordecreasinglevelofutilitythatisobtainedwithaddedconsumptions. RationalChoiceTheory TotalutilityisoftenstudiedalongsideRationalChoiceTheoryandtheLawofDiminishingMarginalUtility.RationalChoiceTheorysaysthatconsumersseektomaximizetheirutilitywitheachunitofconsumption.Consumertheoryand demandtheorysuggestthatconsumeractionsaredriventowardutilitymaximizationbyattemptingtoacquirethemostsatisfactionpossibleinthemostaffordableway.Ingeneral,classicaleconomictheoriesshowthatmostconsumerswanttogetthehighestpossiblelevelofutilityperunitforthemoneytheyspend. Totalutilityisusuallymeasuredinrelativeunitscalledutils.Whenmeasuringtotalutility,analysiscanspanfromoneunitofconsumptiontomultipleunits.Forexample,acookieprovidesalevelofutilityasdeterminedbyitssingularconsumption,whileabagofcookiesmayprovidetotalutilityoverthecourseoftimeittakestocompletelyconsumeallthecookiesinthebag. TheLawofDiminishingMarginalUtility Tobetterunderstandtotalutility,onemustunderstandthe LawofDiminishingMarginalUtility,whichstatesthatasmoreofasinglegoodorserviceisconsumed,theadditionalsatisfaction,referredtoasmarginalutility,drops.Thefirstgoodconsumedprovidesthehighestutility,thesecondgoodhasalowermarginalutility,andsoon.Therefore,totalutilitygrowslessrapidlywitheachadditionalunitconsumedofthesamegoodorservice. HowtoCalculateTotalUtility Eachindividualunitofagoodorservicehasitsown utilityandeachadditionalunitofconsumptionwillhaveitsownmarginalutility.Thetotalutilitywillbetheaggregatedsumofutilitygainedfromallunitsbeingstudied. "Satisfaction"isasubjectivemeasureandwillvaryfromindividualtoindividual,meaningthattotalutilityactsmoreasaguideinunderstandingaconsumer'spsychologicaldecisions. Atotalutilityformulawillincludeutils.Utilsaretypicallyrelativeandassignedabasevalue.Economistsusuallyanalyzeutilsacrossaspectrumtoprovideacomparativeanalysisoftheamountofutilorsatisfactiongainedfromaunitofconsumption.Anassignedbasevalueforutilsisneededbecausetheoreticallythereisnorealvalueforutilitysatisfactioningeneral. Tofindtotalutilityeconomistsusethefollowingbasictotalutilityformula: TU=U1+MU2+MU3… TU=TotalUtility U=Utility MU=MarginalUtility Thetotalutilityisequaltothesumofutilsgainedfromeachunitofconsumption.Intheequation,eachunitofconsumptionisexpectedtohaveslightlylessutilityasmoreunitsareconsumed. TotalUtilityMaximization Economictheoryregardingconsumeractivitiessuggeststhattheprimarygoaloftheconsumeristoachievethelargestamountofutilityfortheleastamountofcost.Thisispartlyduetothelimitedamountoffundsapersonmaypossess,aswellasadesiretoachieveasmuchsatisfactionfromtheconsumptionofgoodsandservicesaspossible. Forexample,ifaconsumerispresentedwithtwopurchasingoptionswiththesamefinancialcost,andneitheroptionismorenecessaryorfunctionalthantheother,theconsumerwillchoosethegoodorservicethatprovidesthemostutilityforthemoney. ExampleofTotalUtility Johnishungryanddecidestoeatachocolatebar.Histotalutilityfromeatingonechocolatebaris20utils.Heisstillhungrysoheeatsanotherchocolatebar,wherehistotalutilityis25utils.Johnisstillhungryandhastwomorechocolatebars.Thethirdchocolatebarhasatotalutilityof27utils,andthefourthhasatotalutilityof24utils.Thisisbestrepresentedinthetablebelow. QuantityConsumed TotalUtility 0Bars  - 1Bar 20utils 2Bars 25utils 3Bars 27utils 4Bars 24utils Witheachadditionalchocolatebar,John'stotalutilityincreases,untilitreachesitsmaxatthreechocolatebars.Withthefourthchocolatebar,John'stotalutilitydecreases.Thiscanbeunderstoodwithmarginalutility;theutilitythatJohnderivesfromeachadditionalchocolatebar. QuantityConsumed TotalUtility MarginalUtility 0Bars  - 1Bar   20utils 20utils 2Bars   25utils 5utils 3Bars   27utils 2utils 4Bars   24utils -3utils Witheveryadditionalchocolatebarafterthefirst,John'smarginalutilityisdecreasing,meaningthatheisderivinglesssatisfactionfromanotherchocolatebar.Thismakessenseasheisgettingmorefullwitheachbar.Afterthethirdbar,hismarginalutilityisnegative,meaningheisderivingnosatisfactionandinfactismadeworseoff;perhapsfeelingsickafterconsumingsomuchchocolateandsugar. TotalUtilityFAQs WhatIsTotalUtility? Totalutilityistheaggregatesatisfactionthatanindividualreceivesfromconsumingaspecificquantityofagoodorservice. WhatIstheRelationshipBetweenTotalUtilityandMarginalUtility? Whiletotalutilitymeasurestheaggregatesatisfactionanindividualreceivesfromtheconsumptionofaspecificquantityofagoodorservice,marginalutilityisthesatisfactionanindividualreceivesfromconsumingoneadditionalunitofagoodorservice.Ifmarginalutilityispositivethentotalutilitywillincrease.Oncemarginalutilityisnegative,thentotalutilitywilldecrease. HowDoYouCalculateMarginalUtilityandTotalUtility? Thebasicformulatocalculatetotalutilityisasfollows: TU=U1+MU2+MU3… TU=TotalUtility U=Utility MU=MarginalUtility Marginalutilityiscalculatedasfollows: MU=ChangeinTotalUtility/ChangeinUnits DoesTotalUtilityAlwaysIncrease? Totalutilitydoesnotalwaysincrease.Whenmarginalutilityisnegative,thentotalutilitywilldecrease.Thismeansthatanindividualdoesnotderiveanysatisfactionfromtheconsumptionofanadditionalunitofagoodorserviceandisworseoffbydoingso. TheBottomLine Utilitymeasuresthesatisfactionanindividualreceivesfromtheconsumptionofagoodorservice.Totalutilitymeasuresthetotalsatisfactionfromaspecificquantityofgoodsorservices.Totalutilityoperateshandinhandwithmarginalutility,whichmeasurestheadditionalsatisfactionreceivedfromtheconsumptionofagoodorservice.Aslongasmarginalutilityispositive,totalutilitywillincrease.Oncemarginalutilityisnegative,thentotalutilitywilldecrease. Economistsaimtostudytotalutilityandmarginalutilitytounderstandconsumerbehavior.Consumerbehaviorhelpstopredictthedemandforgoodsandservices,whichimpactssupplyandtheirprices;allkeymetricsofanalyzinganeconomy. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. UniversityofMinnesotaLibrary."PrinciplesofEconomics:7.1TheConceptofUtility." EncyclopediaofLawandEconomics."RationalChoiceTheoryinLawandEconomics,"Page792. TheLibraryofEconomicsandLiberty."CarlMenger." CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. 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Thelawofdemandstatesthat quantitypurchasedvariesinverselywithprice.Inotherwords, thehighertheprice,thelowerthequantitydemanded. more MarginalBenefit Amarginalbenefitistheaddedsatisfactionorutilityaconsumerenjoysfromanadditionalunitofagoodorservice. more PartnerLinks RelatedArticles Economics WhatDoestheLawofDiminishingMarginalUtilityExplain? Economics WhatIsUtilityFunctionandHowIsItCalculated? Accounting WhatIstheRelationshipBetweenMarginalRevenueandTotalRevenue? GuidetoMicroeconomics WhatMarginalUtilitySaysAboutConsumerChoice GuidetoMicroeconomics MarginalUtilityvs.MarginalBenefit:What’stheDifference? Economics WhatIstheMarginalUtilityofIncome?