What is Utility Maximization?
The actions of a consumer are directed toward utility maximization, where a consumer tries to achieve the best possible satisfaction at the most reasonable cost.
What is Total Utility?
Total utility refers to the amount of satisfaction that a consumer derives from a specific product or service.
How Total Utility Relates to Marginal Utility
To maximize utility, the marginal utility of the money you spent on a product or service, should be equal to or exceed the marginal utility of any alternative purchase for the same amount.
Every consumer unit of product or service has a marginal utility of its own. So, the total utility is simply an individuals sum of units of all the marginal utilities.
How is Total Utility Used?
Economic analysts use total utility to analyze consumer preferences in the marketplace. Total utility ensures maximization of resources by allocating them to services or products
Classical Economic Theory and Utility?
Analysts who use classical economic theory to analyze consumer activities believe that the goal of every consumer is to attain the largest utility at the possible lowest cost. The reason is that people have scarce resources, but at the same time, have a desire to achieve the possible maximum satisfaction from the consumption of products and services.
Example of How Total Utility Works
A consumer has two options for purchasing either goods for the same cost. At the same time, none of the options is more functional or necessary than the other.
In such a scenario, the consumer will choose the option that has the most utility for money.
What is the Law of Diminishing Marginal Utility
The law of Diminishing Marginal utility states that utility declines with each additional unit of the same product or service.
In other words, the more you consume a particular product or service, the more the additional satisfaction drops. The first good or service you consume will give you the highest marginal utility. The second time you consume it, the marginal utility will be less, and so on.
What is the Effect of the Law of Diminishing Marginal Utility?
For consumers to ensure that they maximize total utility, they will always seek to attain different mixtures of products as well as services. Since they have scarce resources, consumers usually make choices that will increase their total utility with every extra unit of consumption.
Related Topics
- Budget Constraint
- Radner Equilibrium
- Opportunity Cost
- Opportunity Set
- Marginal Analysis
- Utility
- Self Interest
- Cost-Benefit Analysis
- Enlightened Self-Interest
- Fisher’s Separation Theorem
- Ratchet Effect
- Total Utility (Economics)
- Efficiency Principle
- Expected Utility
- Subjective Theory of Value
- Positional Goods
- Utilitarianism
- Indifference Curve
- Time Preference Theory of Interest
- Incentives
- Marginal Benefit
- Marginal utility
- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
- Economic Efficiency
- Efficiency Theory
- Productive Efficiency
- Capacity Utilization Rate
- Allocative Efficiency
- Pareto Efficient
- Comparative Advantage
- Criticisms of the Economic Approach
- Behavioral Economics
- Normative Economics
- Positive Economics
- Invisible Hand
- Sunk cost