2.5 Concepts of Utility — and the Two Approaches

Utility = the want-satisfying power of a good — subjective (in the mind of the consumer, not in the good). Types: • Total utility (TU) — satisfaction from consuming a given quantity overall; • Marginal utility (MU) — addition to total utility from consuming one more unit (MU = ΔTU); • (Broader "forms of utility" sometimes asked: form, place, time, possession — value added by changing shape, moving, storing, and transferring ownership — law students meet these again in sale and lease law.) The Law of Diminishing Marginal Utility (Marshall's statement, Gossen's first law): as successive equal units of a good are consumed, the extra satisfaction from each unit falls. Worked table (cups of tea): TU rises at a decreasing rate; MU falls; TU is maximum where MU = 0, and falls when MU < 0. This law also solves Adam Smith's diamond–water paradox: water is supremely useful but abundant, so its marginal utility (and hence price) is low; diamonds are useless but scarce, so marginal utility (price) is high — price reflects marginal, not total, utility.