This table shows that when a consumer consumes 1 g of potato in a week it obtains 9 utils. At 5 g obtains 35 etc. The total utility that a consumer obtains results from the quantity that he consumes. The third column is about the marginal utility. The marginal utility law states that as the individual increases the consumption of a given product, as is shown in the table, the marginal utility gained from consumption eventually declines.
(Roger A. Arnold, “Economics”, 5th edition, 2000)
Graphic description of total and marginal utility
Table2: total utility
The table of total utility (table 2), reveals that total utility increases as the consumption of a good increases. This exists till one level and from this level there is a decline in total utility. At the second table (table of marginal utility), is obvious that utility declines until it reaches point zero, and from this point becomes negative. This happens because every additional unit offers less pleasure, until there is no pleasure at all, because the need for this good doesn’t exist any more. So the result is that the marginal utility of a good or a service declines as the consumption of it rises.
(David Begg- Stanley Fisher- Rudiger Dornbusch, “Economics”, 5th edition, Mc Graw Hill, 1997).
Therefore the personal physiological behavior of a consumer in contrast with the continually rise of the quantity of products is described by the decline of marginal utility. This results by the feeling of complement and the abilities of goods and services to have limited ways of usage. The needs of consumers are based upon their income and their place of living but also the needs between the consumers are different, and every single product or service provides different pleasure or utility to the various consumers. There for, the condition of total and marginal utility is different from consumer to consumer.
(Th. Georgakopoulos- Th. Lianou- Th. Benou- G. Tsekoura- M. Xatziprokopiou- G. Xristou, “Eisagogi Stin Politiki Oikonomia”, Ekdoseis Gutenberg, Athens, 1982).
The utility of different goods and services, and the balance of the consumer
Each consumer has several needs that can be satisfied by the consumption of several goods or services. Also has a specific income that uses in order to satisfy his needs, with the purpose of maximizing the utility and satisfaction by this consumption.
Measurable and totally utility of goods.
The utility of a product or service can be measured in utils. So the consumption of different goods gives a sum of utils. For example, a product X1 equals with 10 utils, the product X2 equals with 20 utils and these two give a sum of 30 utils. So the total utility (U) equals with 30 utils.
The problem that comes along is which the best way that a consumer can distribute his income between the different products in order to maximize the condition of marginal utility.
(Nikolaos G. Marmatakis, “Theoritiki Oikonomiki”, Thessaloniki, 1983).
It is obvious that the consumer will try to spread his income in such a way that every money he spends would provide him all the utility he needs. So he must decide in which way he’ll spend his income, having of course a good knowledge of his preferences, his income, the price of the product and the total and marginal utility this product provides. This can be seen with the following mathematical condition: the marginal utility of a product divided by its price can provide the maximum utility to a consumer.
(Dr. K. D. Traxana, “Oikonomiki Ths Dioikisis- Posotikes Methodoi Epixeirisiakis Lipsis Apofaseon”, Ekdoseis A. Stamoulis, Athens, 1994).
Application of the theory of utility
There are many factors that affect the consumer’s behavior. The first is as it was mentioned before the physiological “law” of utility. At this unit there will be an analysis of the way the consumer’s choice is affected for one product, the result of a substitute and the result of income. Also we will see the paradox of the price and the consumer’s surplus.
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The curves of demand of consumers.
It is known that the marginal utility of a product x (MUx), divided with its price (Px) equals with λ. Lets assume that the λ is constant and equal to unit. Then MUx= Px. So if a product’s price is 1 euro, the marginal utility of it is 1 util etc.
On the other hand, it is important to see it the consumer is willing to pay 1 euro to obtain 1 unit of utility. If he is, this means that he is looking for this “util” and that the curve of marginal utility and the curve of demand of the consumer for this particular product are matching. This is shown on the table above.
The theory of utility is useful in order to explain the movement of various factors that may influence the curve of demand. A change in the consumer’s needs equals with a change in the marginal utility the consumer obtain by this particular product. This often happens with fashion that changes every year and the marginal utility of a cloth is lessening. In a graphical description this is shown with a displacement of the curve of marginal utility to the left with an additional displacement of the demand curve to the left and an analogical displacement of the demand of the market.
(Ray Powell, “Economics For Professional and Business Studies”, 2nd edition, DP Publications Ltd, 1993).
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Result of income and substitution.
When the price of a good falls, the power the consumer has with his income rises and the same exists for the opposite. For example, when the price of petroleum falls, the consumer can raise the consumption of this product and additionally the consumption of other products.
From this conclusion results the following: the result of the change in the price of a product equals with the result of substitution plus the result of income. So if we have a product X1 with price of Px and a product Y1 with price Py and the income of the consumer as a fact, then:
MUx/Px= MUy/Py=} the income of the consumer equals with Px*X+Py+Y
If the price of product x and the price of product y change at the same time and the income of the consumer remains constant, then the quantity of products should change in order to be a balance in the previous condition.
The marginal rate of substitution is based in the change in the relationship between two product and their prices. For example if there are two products: coffee and tea, and the price of coffee rose, then demand for this product would fallen and the demand for tea would risen. This has a result the increase of marginal utility of coffee and the decrease of the marginal utility of tea. The changes in quantity would affect the balance between these two products. The substitution of coffee with tea is called “marginal rate of substitution” and is always negative, because every change in prices has the opposite effect in the demand of a particular product.
(Mark Hirschey- James L. Pappas- David Whigham, “Managerial Economics”, European edition, The Dryden Press, 1993).
The increase of a product’s price has as a result the decrease of the consumer’s power and the decrease of his income. The decrease of the income usually doesn’t affect much the demand in quantity of a product. This effect is presenting the “income’s result” and strengthen the “marginal rate of substitution”. Although, the result of income is insignificant, because the change of the price of one product less affects the consumer’s income and for this reason, the result of the change in the price of one product is the modification of the product’s output to the opposite direction, according to the law of demand.
(-Nikolaos G. Marmatakis, “Theoritiki Oikonomiki”, Thessaloniki, 1983).
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The marginal utility and the water diamond paradox.
In nineteenth-century economists like Adam Smith where interested in understanding why the price of the water, a good important for survival was far too less than the price of diamonds. The answer to this can only been given with the concept of marginal utility and not with total utility.
The plenty of water and the low price of it give the consumer an opportunity to obtain much of it, in order to satisfy needs like thirst, cleaning etc.
The concept of marginal utility will provide a low price as it shown it the previous table. In the quantity of water Q1 correspond the price P1, but for diamonds the marginal utility of quantity of Q2, according to the infrequent of them and the high cost of their production gives the high price (P2).
The theory of marginal utility provides an assistant in order to understand the consumer’s surplus. When the consumer offers money to obtain a product gains satisfaction from this transaction, even though he spent money from his income. This results that the consumer often enjoys more than he can afford. This that he obtains above his sacrifice is called consumer’s surplus.
(David Begg- Stanley Fisher- Rudiger Dornbusch, “Economics”, 5th edition, Mc Graw Hill, 1997).
The table at page 12 is helpful at defining what the consumer’s surplus is.
At this table is assumed that price equals marginal utility. For the quantity of Q2 amounts total utility of points 0Q2BA. For the quantity Q3 amounts 0Q3CA etc. for the quantity of 0Q3 the consumer pays value of 0Q3CP3. This consumer gains a satisfaction in total utility of 0Q3CA and pays 0Q3CP3. The consumer’s surplus is given by the triangle of P3-C-A. This theory has many applications in real life, especially about projects that have as a purpose the welfare of consumers.
Indifference curves
An indifference curve is the curve of all the points that represent the combination of two products that offers the same utility to the consumer. Among these two products the consumer is indifferent between choosing.
This theory is based on the fact that consumers don’t measure the utility of each good but compare the goods and make combinations based on the price and the utility of them.
For example let us imagine there are two kinds of cloths, blouses and trousers. The consumer has a particular income that he will spend for these two goods, but he will allocate his income in order to maximize the marginal utility. At the next table are given the combinations of blouses (X) and trousers (Y) that give the consumer this satisfaction.
In the previous table there are many combinations of Y and X that give the consumer satisfaction. Even though, the consumer is indifferent between the combinations of 1, 2, 3 etc., if it wants the second combination he has to sacrifice 20 units of Y in order to obtain 10 units of X. This means that the consumer substitutes product Y with product X, and also substitutes Y with a larger quantity of X. This relationship between lessen of one quantity and obtaining of another is the marginal condition of substitution of product Y to product X and mathematically expressed as ΔY/ΔX.
Let’s assume that the consumer has larger income and these preferences, this has as a result that he could obtain more quantity of these two products.
At this diagram let’s assume that the curve of U1 has all the combinations of the table. Each point of the curve is a combination of Y and X products and gives satisfaction to the consumer. All the other combinations have no interest to him even though they may provide him the same utility. For this reason the curve of U1 is called an “indifference curve”.
(Nikolaos G. Marmatakis, “Theoritiki Oikonomiki”, Thessaloniki, 1983
If the consumer wants a higher degree of utility, then he must obtain larger quantity of the two products. This is shown with the U2 curve etc. The system of the indifference curves is the “map of indifference” of a consumer. When there is a movement to the right, then the curves have a larger utility.
(Th. Georgakopoulos- Th. Lianou- Th. Benou- G. Tsekoura- M. Xatziprokopiou- G. Xristou, “Eisagogi Stin Politiki Oikonomia”, Ekdoseis Gutenberg, Athens, 1982).
Uncertainty and the consumer
Each consumer has a specific personality and personal preferences. In the economical, social and cultural environment that he is living has several effects that make him choose and decide about his preferences.
A characteristic of life is the uncertainty and ignorance. To every step the consumer takes is facing this ignorance and uncertainty. He isn’t aware about the conditions in the market, neither his needs nor the goods that will fill his needs and satisfy him. He is not sure is a certain product will give him the utility he needs, so he obtains something in order to give him some satisfaction and then compares the satisfaction he gained with the expected satisfaction in order to have experience to his next step.
Let’s see a diagram of the factors that influence consumer’s choice:
It is obvious that uncertainty plays an important part in the consumer’s behavior. Because of this uncertainty, the utility that the consumer obtains is only theoretical and plays no part at the decision making of the consumer.
Bibliography
-Dr. K. D. Traxana, “Oikonomiki Ths Dioikisis- Posotikes Methodoi Epixeirisiakis Lipsis Apofaseon”, Ekdoseis A. Stamoulis, Athens, 1994.
- Mark Hirschey- James L. Pappas- David Whigham, “Managerial Economics”, European edition, The Dryden Press, 1993.
-Nikolaos G. Marmatakis, “Theoritiki Oikonomiki”, Thessaloniki, 1983.
-E. Douglas,” Managerial economics, Theory, Practice and problems”, Prentice hall, 1983.
-Th. Georgakopoulos- Th. Lianou- Th. Benou- G. Tsekoura- M. Xatziprokopiou- G. Xristou, “Eisagogi Stin Politiki Oikonomia”, Ekdoseis Gutenberg, Athens, 1982.
-Ray Powell, “Economics For Professional and Business Studies”, 2nd edition, DP Publications Ltd, 1993.
-David Begg- Stanley Fisher- Rudiger Dornbusch, “Economics”, 5th edition, Mc Graw Hill, 1997.
-Roger A. Arnold, “Economics”, 5th edition, 2000