If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

## AP®︎/College Microeconomics

### Course: AP®︎/College Microeconomics>Unit 1

Lesson 6: Marginal analysis and consumer choice

# Marginal utility and total utility

When allocating a budget, we can use the concepts of marginal utility and marginal benefit to help us decide where our money is best spent. In general, we should allocate our budget towards items that will provide us with the highest marginal utility or marginal benefit. This way, we will be maximizing the satisfaction or value we receive from our budget. Created by Sal Khan.

## Want to join the conversation?

• Is there any exception to the Law of Diminishing Marginal Utility ?
That is that as more units are consumed the utility obtained rises.
• Yes: addictive substances. The more you consume, the more you will give up to get an additional dose.
• But how do economists actually calculate marginal utility? How can you assign a "figure" to the level of "satisfaction"? How can you know the MU from first chocolate bar to the second drops 20% and not 30% for instance? When you make a vague concept like satisfaction mathematical and represent it by figures, they should be accurate or tend to be accurate, because you're gonna rely on all their graphs and conclusions inferences derived from them. No?
(sorry for my English though)
• The marginal utility is different for each person. It isnt a value that you can read in a table somewhere. If you are looking at a group of people that are allergic to fruits then their marginal utility will be different than yours for example. But you can conduct surveys and statistically say things like "The average english 18 year old boy has a utility function that looks like ...."
• alright, this sort of confused me around the mark when Sal talks about spending the 3rd dollar. the fruit costs \$2/lb, so you cannot purchase a pound of fruit for just \$1 (the third dollar). you would need to spend dollars 3 and 4 to purchase that pound of fruit.

i know that he clarifies things a bit more when talking about the 4th and 5th dollars, where each can only purchase 1/2 a pound of fruit. but just for the sake of clarification, if you were to opt on purchasing fruit with the 3rd dollar, you would need to spend the 3rd AND 4th dollar to get the 60 marginal units of satisfaction or whatever it's called right?
• It messed with me too. He saying you can buy 1 Lb for \$1 and it will give you 60 MU. What got me was the numbering of the MU of fruit. The MU/\$ scale for fruit should be redo to state 0.5LB=MU 60, 1Lb=MU60, 1.5LB= MU50, 2LB=MU50, 2.5LB=MU25, 3LB=MU25 Etc.. When stated like this you can compare the MU cost of 1 bar to 0.5Lb or dollar to dollar. Does this help?
• If anyone is wondering - the "utility points" are called "utils". This is the unit they are measured in that my economics professor teaches anyway. So for example on the last two dollars spent, you would get 120 utils.
• What is barter system? explane with example,
• A barter economy is a cashless economic system in which services and goods are traded at negotiated rates. For example if i want eggs but i can only produce milk i would barter (trade) my milk with eggs provided by someone who produces eggs.
• It is said that as we get more and more of anything, our marginal utility falls. Can this be applied to money as well?
(1 vote)
• It applies perfectly well to money. The utility I gain going from \$100 to \$200 is a lot higher than the utility I gain going from \$5000 to \$5100 (per week, month, or whatever unit of time over which you are measuring).
• I read from a book that the utility is maximized when MUx/Px=MUy/Py. Why by using this equation can we find the combination with maximized utility with this equation?
• The equation is equivalent to: MUx / MUy = Px/Py, so the ratio of the marginal utilities is equal to the ratio of prices. Therefore, increasing your collection by a marginal unit of X (& decreasing by a marginal unit of Y) has the same utility and same cost as the initial collection. The same is true if X is decreased by a marginal unit, and Y is increased by a marginal unit (assuming that the commodities can be divided into small enough units, technically continuous). Thus the total utility derived cannot be increased by trading a marginal unit of X for Y, or Y for X, so the total utility derived from the collection is at a maximum.
A more intuitive way of thinking about it is to consider the individual's indifference map related to the two commodities. The total utility is maximised at the point on the budget line [possible collections of X and Y the consumer can buy with a given amount of money], where an indifference curve is tangential to the budget line [assuming that the indifference curve is convex to the origin and likewise that the law of diminishing marginal utility indeed holds for each of the commodities]. At this point, the gradient (derivative) of the indifference curve (MUy/MUx) equals the gradient of the budget line (Py / Px) so MUy/MUx = Py/Px.
• In the example of the video the first chocolate bar gave 100 marginal "satisfaction points" and the second bar gave 80 marginal "satisfaction points".
Say there were no fruits and I wanted to have 100 marginal "satisfaction points", would I just buy the next 2 bars at once?
• Not really. Think about it this way - if you eat one chocolate bar, after a long time of having no chocolate, boy is that bar GOOD. That is the absolute best a bar can taste. That's the 100 points bar. But the bar you have immediately after it, it's good alright, mmm, but it doesn't quite taste the same as the first bar. And the tenth bar is making you feel positively queasy.

There's not much you can do to make the second bar as good as the first, so marginal satisfaction is always going to decrease with the second bar.