For example, let’s say that you are hungry and are buying fish to eat for supper. Let’s also say that one fish costs $2. If you’re so hungry that you would pay $8 for the fish, the fish is said to provide $8 worth of utility. In other words, you’re willing to pay $8 to get the satisfaction from the fish no matter what it actually costs.
For example, let’s say that you plan to eat two fish. However, after eating the first fish, you’re not quite as hungry as before. Now, you’d only pay $6 for the extra satisfaction of the second fish. It’s not worth as much to you now that you’re somewhat full. This means the two fish provide $6 + $8 (first fish) = $14 of “total utility” together. Note that it doesn’t matter whether or not you actually buy the second fish. MU is only concerned with what you would pay for it. In real life, economists use complex mathematical models to predict what consumers hypothetically would pay for something.
Let’s say that, in the example situation in Step 2, you decide that you’re hungry enough to eat four whole fish. After the second fish, you’re feeling a little full, so you would only pay about $3 for the next fish. After the third fish, you’re almost completely full, so you would only pay $1 for the final fish. The satisfaction you would get from it is almost cancelled out by the feeling of being uncomfortably full. You can say that the four fish provide a total utility of $8 + $6 + $3 + $1 = $18.
$18 - $14 (example from Step 2) = $4 4 (fish) - 2 (fish) = 2 $4/2 = $2 This means that, between the second and the fourth fish, each extra fish is only worth $2 of utility to you. This is an average value; the third fish is actually worth $3 and the fourth is actually worth $1, of course.
Finding this is easier than it sounds. Just use the normal equation to find the MU when the change in quantity of goods consumed is one. In the example situation, you already know the MUs for each individual unit. When you haven’t had any fish, the MU of the first fish is $8 ($8 of total utility - the $0 you had before/change of 1 unit), the MU of the second fish is $6 ($14 of total utility - the $8 you had before/change of 1 unit), and so on.
Given this information, you wouldn’t actually end up buying the fourth fish. Its marginal utility ($1) is less than its marginal cost ($2). Basically, you’re losing utility on this transaction, so it’s not in your favor. )
Note that the column headers will not always match these exactly. For example, the “Quantity” column may be labeled “Items bought,” “Units purchased,” or something similar. The important thing is the information in the column.
In the example chart above, this trend of diminishing returns starts almost immediately. The first ticket to the film festival provides lots of marginal utility, but each ticket after the first gives a little less. After six tickets, each extra ticket actually has a negative MU, which decreases the total satisfaction. An explanation for this might be that, after six visits, the consumer starts to get tired of seeing the same movies again and again.
Let’s say that the tickets in the example chart cost $3 each. In this case, utility is maximized when the consumer buys 4 tickets. The next ticket after this has an MU of $2, which is less than the marginal cost of $3. Note that utility isn’t necessarily maximized when the MU starts to become negative. It’s possible for goods to give some benefit to the consumer without being “worth it. " For instance, the fifth ticket in the chart above still gives $2 worth of MU. This isn’t a negative MU but it still decreases the total utility because it’s not worth the cost.
Average Utility: The total utility in each row divided by the quantity of goods purchased. [13] X Research source Consumer Surplus: The marginal utility in each row minus the product’s marginal cost. It represents the “profit” in terms of utility the consumer gets from buying each product. It is also called “economic surplus. “[14] X Research source
