A Primer on Microeconomics, Volume I by Thomas M. Beveridge

Author:Thomas M. Beveridge
Language: eng
Format: epub
Publisher: Business Expert Press
Published: 2017-10-23T16:00:00+00:00

Marginal utility is the derivative of the total utility function. This relationship is also present for other “total-marginal” pairs in economics, such as total revenue and marginal revenue, total cost and marginal cost, and total benefit and marginal benefit.

THINK IT THROUGH: When Mick Jagger famously sang, “I can’t get no satisfaction,” was he referring to his total utility or to his marginal utility? Assuming away the double negative in the lyrics, Jagger (who attended the London School of Economics) must have been meaning his marginal utility, as it is unlikely that his total level of enjoyment in life was zero.

THINK IT THROUGH (more): If, indeed, Jagger is referring to marginal utility, then what does his assertion tell us about the level of his total utility? If he has reached the point where his marginal utility is zero, then his total utility must be maximized. The conclusion we must reach, then, is that his total satisfaction is at its peak—decidedly not the message intended by the song!

THINK IT THROUGH: The law of diminishing marginal utility states that after some point, equal successive units of a good consumed will yield diminishing marginal utility. This does not rule out the possibility that, initially, marginal utility could increase as equal additional units are consumed. Can you think of any examples of increasing marginal utility? Examples might include activities where satisfaction increases with skill or heightened appreciation. Repeated listens to a piece of music might enhance enjoyment.

THINK IT THROUGH: If we experience diminishing marginal utility from the dollars we receive as income, does it make sense to redistribute income from rich people to poor people? At the societal level, because the utility lost from the dollar taken from the rich person presumably would be less than the utility gained from the same dollar given to the poor person, then society would gain from the redistribution.

THINK IT THROUGH (more): Should we reallocate so that everyone’s income is equal? No. For one thing, the assumption that “because dollars are equalized then marginal utilities must be equalized” is questionable. Also, what about incentives? If we adopt an “equal shares for all” strategy, then the motivation to produce is lessened. Given that if the size of the economic pie is reduced, then we all lose. In a college course, if an equal grade (C) was guaranteed for all students, regardless of their performance, what is likely to happen to the level of effort?

The Utility-Maximizing Rule

We can develop a principle to enable the individual to maximize his total utility, given his income, tastes and preferences, and the prices of the goods he might purchase. Simply put, this rule states that the consumer should seek to allocate expenditures and buy goods in such a way that the marginal utility per dollar for the last unit of each good bought is equalized. Mathematically, this would be expressed as:

MUA/PA = MUB/PB

where MUA is the marginal utility of the final apple bought, PA is the price of apples, MUb is the marginal utility of the final banana bought, and PB is the price of bananas.

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