Total Utility: Sum of Utilites from Commodity Units - Essay Sample

Introduction

Every commodity has utility for the consumer. Total utility is the total of utilities obtained by the consumers from the different units of a product. For instance, if a consumer buys apples, he receives them in groups 1, 2, 3, and so on (Amacher & Pate, 2019, part 2.4). Two apples have more utility than one, and three have more utility than two. The units of apples chosen by the consumer are in descending order of their utility. Total utility is the sum of the full utilities obtained by the consumer from different units of commodities.

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Marginal utility is the addition to the total efficiency by having an additional unit of commodity. In other words, it is the loss of utility if one group is consumed. To illustrate this, the marginal utility (MU) of N number of units of the commodity is the total utility (TU) of N units minus the overall utility of N-1. Therefore MU= TU-TU (N-1). There is a decrease in the marginal utility in the increasing total utility up to the point that the marginal utility is zero. This is the point of satiety for the consumer (Mohammed, 2018, part 2.3). When total utility decreases, the marginal utility is negative. Those units give the disutility or dissatisfaction, and therefore there is no use having them.

Can the marginal utility be negative?

Yes. The marginal utility may decrease into a negative utility, meaning that consuming another unit of the product is unfavorable. Therefore, the first unit of consumption is, therefore, highest and every unit of consumption following has less and less utility (Poier, 2019, part 2.5). The consumers handle the law of diminishing margins utility by consumption of numerous quantities of different quantities of goods. Negative marginal utility means that at some point, you get worse off by use of an extra unit of the product, for instance in the case of food. If one is hungry, you can eat a hamburger with chances of marginal utility being high. The second one will have a less marginal utility while the third one have very less. This is also known as diminishing marginal utility as the subsequent hamburger will give you less utility (Poier, 2019, part 2.5). At some point, you will be full and consumption of more makes you sick meaning the last hamburger has a negative marginal utility. This is similar to the case of other goods such as alcohol and medicine.

Diamond Water Paradox

Why are diamonds valued more highly than water? The theory of marginal utility that is based on the subjective theory of value indicates that the price in which the object trades in the market is based not on the amount of labour exerted in the production as in the labour theory of value and not also on the usefulness of the commodity as a whole. However, the price is determined by the marginal utility (Amacher & Pate, 2019, part 2.4). The marginal utility of a good is derived from the most important to the person. Therefore a person will use the goods possessed to satisfy the needs or wants.

To explain the diamond water paradox, the marginality explain that not the usefulness of diamonds or the water determine the price. It is the usefulness of each unit of water or diamonds. The utility of water to people is tremendous as they need water to survive. Water is also in large supply in the world, making the marginal utility of water low (Poier, 2019, part 2.5). Therefore the additional units of water can be applied to less urgent uses as the urgent uses of water is satisfied. The units of water become worthless as the water supply increases. Diamonds on the other hand are lower in supply (Amacher & Pate, 2019, part 2.4). They are in low supply and the usefulness of any additional diamond is greater than that of an additional glass of water that is abundant supply. Therefore those who want diamonds are willing to pay a higher price for the units of diamond as compared to one glass of water. The sellers of diamonds ask a higher price for diamonds than that of water.

On the contrast, a man in the desert dying of thirst could have a marginal use of water than that of diamond and would therefore pay more for water, maybe to the point where he was no longer dying. At the low levels of consumption, water has a higher marginal utility than diamonds and thus are more valuable (Amacher & Pate, 2019, part 2.4). People will consume water at high levels compared to diamonds, which makes the marginal utility and the price of water lower than those of the diamonds.

The Law of Diminishing Marginal Utility

The law of diminishing marginal utility states that all else equal as consumption increases the marginal utility derived from each additional unit decline. Marginal utility is derived from change in utility when an additional unit is consumed. Utility is an economical term that is used to represent satisfaction or the happiness. It is an incremental increase in utility that result from the consumption of an additional unit (Poier, 2019, part 2.5). The assumption of the law of diminishing marginal utility include the standard unit where it is assumed that each commodity have a standard for the unit of the consumer good. To add on that is the consistency in the consumer tastes that imply that the taste of the consumer must be same during the consumption period. Change in the taste of the consumers make the law not to hold (Mohammed, 2018, part 2.3). The consumption of the commodity should also be continuous and intervals between the consumption must be short.

An example that does not obey the law of diminishing marginal utility include debt. For example, the case of adding debt or printing more money can delay the problem of the nation's solvency. In this case, every extra dollar or money created makes the problem that is delayed more badly. When the crunch time is delayed, the debt increases (Amacher & Pate, 2019, part 2.4). When the debt increases, the crisis continue stretching and increase the suffering in the time period (Mohammed, 2018, part 2.3). The crunch time makes the country weaker than before and therefore the affected must swallow a bigger collapse as the defaults get bigger. Any bad policy created increases and worsens the problem when the bad policies are added (Poier, 2019, part 2.5). The reason behind is because, any bad policy weakens the nation and decreases the ability to withstand the negative effects of the additional ones. Injuries and illnesses are also other examples that do not obey the law of diminishing marginal utility since as you get more cuts or illnesses your body begins to get weaker.

References

Amacher, R. and Pate, J. (2019). Principles of microeconomics (2nd ed.).

Mohammed, F. (2018, February 12). Why are diamonds more expensive than water?

Poier, S. (2019). Adam Smith and the Austrian School of Economics: The Problem of Diamonds and Water. Zeszyty Studenckie Wydzialu Ekonomicznego „Nasze Studia”, (9), 162-173.