Introduction to Differences Between Total Utility and Marginal Utility
Total Utility and Marginal Utility are the terms that we are all familiar with from the subject of Economics. Both the terms are extremely important, not only for the students to learn, but also to know about the usefulness of a commodity. While this might come off as a completely new set of terms for some people, these are, however, one that many are well acquainted with.
It is a very important part of understanding the two, that the students not only know their definition but also what difference between marginal utility and total utility.
Difference between Total Utility and Marginal Utility
Similarity Between Total Utility and Marginal Utility
One similarity between Total Utility and Marginal Utility is the fact that these are both useful to economists. These essentially help them in understanding the consumer behavior pertaining to a single commodity - good or service. This is a way to identify whether or not there needs to be a change or advancement to the commodity they are offering.
More About the Topic
Utility, in general, means the usefulness of a good or service. In the Economics context, utility is more precisely defined as the satisfaction – actual or expected – that a consumer derives from using or purchasing a commodity.
In recent practice, utility is represented primarily in numerical value. In the 1300s and 1400s, Spanish economists considered only the qualitative usefulness of commodities, which would allow them to determine the prices for various goods and services. This concept went through multiple phases of change, from the ordinal model to the cardinal model.
These economic theories concerning utility combined with the assumption that every rational consumer would strive to maximize his/her utility from a particular product, thus, form the basis for determining demand and consequently their price.
There are three ways utility is expressed in Economics – total utility, average utility, and marginal utility. The difference between total utility and marginal utility alongside their corresponding relationship are crucial topics in senior secondary Economics and require an in-depth understanding of their intricacies.
Therefore, prior to beginning with distinctions between these two ideas of utility, it is quintessential to learn about those individually.
What is Total Utility?
Total utility (TU) is the whole amount of fulfillment that a consumer derives from the consumption or purchase of multiple units of a particular commodity, within his/her fixed income level and budget.
A total utility example would be, one unit of a chocolate bar provides you with a utility of 10 utils; on the 2ndunit you receive 8 utils worth of satisfaction; the 3rd unit provides a utility of 5 utils. Therefore, the TU you derived from the consumption of three chocolate bars is 23 utils (10 + 8 + 5).
Utils is the standard unit for measuring utility. It is a relative unit as utility derived from the consumption of a particular product will differ from one individual to another. For this purpose, economists suggest the usage of monetary denominations in lieu of utilization for more effective quantification.
What is Marginal Utility?
Marginal utility definition Economics would be the change in total utility due to the consumption of one additional unit of a commodity. In other words, it is the utility one derives from the consumption of an individual unit rather than in whole.
Hence, if considering the above example, the 10 utils from the first chocolate bar, 8 utils from the second bar, and 5 utils from the third bar can be represented as the marginal utility of that chocolate bar.
Derivation of MU is crucial to economic practice since it lends an idea about a product’s demand for an individual consumer.
A marginal utility example would help in understanding the above statement more clearly. Upon consumption of one unit of product X, you derive 20 utils of satisfaction. On to the next unit, you derive 15 utils of utility. It goes on till the 6th unit when additional utility derived from the consumption of one extra unit has come down to zero, i.e. MU = 0. A rational consumer would stop his/her consumption at this point since he/she is not deriving any extra satisfaction.
Therefore, the demand for product X for you would be 6 units. This phenomenon of gradual declination in MU is known as the law of diminishing marginal utility.
According to this law of marginal utility, the first unit would provide the highest level of utility and then as consumption increases, marginal utility declines.
The primary differences between TU and MU are discussed in the table below.
What is the Relationship Between Total Utility and Marginal utility?
The relationship between TU and MU can be properly understood through the table beneath. Here, we are assuming that the consumer is rational and expects utility from the consumption of coffee. Each unit is a cup of coffee.
We can see that both TU and MU began from the same point. However, as consumption increased, total utility continued increasing, whereas, the marginal utility kept declining in line.
On the 7th unit, when total utility is at its peak (95 utils), the marginal utility was zero, therefore, implying that any additional cup of coffee from that point would result in negative MU or dissatisfaction. A rational consumer would stop his/her consumption at the 7th unit.
Thus, from the above discussion, we can encapsulate the relationship between TU and MU as noted below –
Marginal utility falls when total utility rises
MU = 0 when total utility is maximum
From a consumer’s perspective, the marginal utility can be aligned with the cost of consuming a commodity. For instance, if the marginal utility cost of a commodity is Rs.20 and MU derived from it is more than 20 utils (assuming Re.1 = 1 utils), then such individuals will continue his/their consumption until the marginal utility of that commodity equals its price. It is also known as the consumer’s equilibrium.
While this is one topic from Economics, multiple such topics require a thorough understanding, since memorizing this subject does not cut it if you want to ace your exams. For that purpose, you can refer to Vedantu’s study materials and online live classes.
FAQs on Difference between Total Utility and Marginal Utility
1. What is Total Utility?
Utility means the satisfaction a consumer gets from consuming a particular commodity. So, naturally, total utility means the total amount of satisfaction garnered by a consumer as and when they consume a number of units of the same commodity. This is one that gets increased with each additional unit consumed. Although the rate at which it increases keeps on decreasing as more and more units are consumed by them. It should be kept in mind that total utility is calculated with consideration of only one specific good or service.
2. What is the meaning of Marginal Utility?
Marginal utility is the satisfaction that a consumer gets when they consume an additional unit of a commodity. This includes the first unit and all the ones that follow it in order to keep a consumer satisfied. However, like with total utility, this can also be just calculated for one specific commodity at a time. The marginal utility also decreases with each additional commodity that a particular consumer consumes. It can be calculated using the formula - Total change in utility divided by the difference between the number of goods.
3. What is the meaning of The Law of Diminishing Marginal Utility?
The Law of Diminishing Marginal Utility pertains to the fact that the amount of satisfaction derived by a consumer tends to decline with each additional unit of a good or service consumed by them. This basically means that with each unit of a commodity that is consumed by a person, the satisfaction that they get from it goes on declining. For example: If they get the satisfaction of 10 utils with the first banana, it will be followed by the satisfaction of 8 for another after that. And this goes decreasing to zero or even a negative until the consumer stops consuming them.
4. How can a student understand the difference between Total Utility and Marginal Utility?
There are many ways in which a student can understand the difference between Total Utility and Marginal Utility. Although they might be taught these two terms and more about them in school, they must still look towards other sources. For instance, their teachers can play a huge role in getting them to understand not only the basics but also the formulas and how they work. Along with a good teacher, they must also look towards some online study material. At Vedantu, they can find just that and even more insights into any topic such as the difference between Total Utility and Marginal Utility.
5. How are the calculations for Total Utility and Marginal Utility important in the real world?
Total Utility and Marginal Utility are the two tools that guide the many economists in the world. These help them determine consumer behavior when it comes to a certain product. With this, they can even get to know the value and demand of a product or service. This is especially very useful information for many business people out there who are looking towards expanding their business. This information also comes in handy while they have to determine whether or not they need to make any updates to the commodity that they are offering the consumers.