Utility in a nutshell

After watching the video of utility it should be clear to you that it is all about consumer demand theory according to the utility approach. The satisfaction or use that a consumer receives from the consumption of a product was investigated. This implies that a saturation point and a budget constraint exists, which should also be taken into regard on the demand side. Utility can also be negative due to storage requirements or other problems with shortages - too much of something good is usually bad

Pay special attention to:

• What is meant with utility
• We prefer to rank utility ordinal, which means we determine what is being preferred more that something else, according to one’s ranking order of preference, because it is difficult to measure utility. Now it is much easier to say I prefer this one above that and another one even more.
• Total utility increases as more of a product is being consumed
• Marginal utility is very important, and make sure you are able to calculate marginal utility from total utility given in the table (or schedule). “Marginal” means additional or extra. It is every time the extra use that you would obtain by consuming an additional unit of that product.        

               (

\MU₂ = TU₂ –TU₁   and   TU₂ = TU₁ + MU₂)

Note the Law of Diminishing Marginal Utility. As one uses more of a product the extra value that you get out of it is becoming constantly less.

Here is a summary on how to calculate MU, TU and weighted marginal utility.