How To Calculate Total Utility And Marginal Utility In Economics?

Because marginal utility is the change in utility as a result of the addition of a new unit or units, marginal utility can be calculated as the change in total utility divided by the change in unit quantity. This is how it would look:

The difference in total utility is derived by subtracting the present total utility from a previous total utility.

The change in units is computed by subtracting the current unit amount from the previous unit amount.

The term “current” refers to the most recent utility occurrence you have to deal with. Remember that the prior total utility amount must match the preceding unit amount.

In this example, we’re looking at the marginal utility between neighboring events, or the change as each new soda is added.

You can, however, look at the marginal utility of non-successful events. The marginal utility of one soda vs three sodas, for example, is 1.5. This is computed by dividing the total utility of three sodas (seven) by the total utility of one soda (four) and then multiplying by the unit change (two).

It’s worth noting that this is only the averaged marginal utility of the two drink amounts. This is due to the fact that the marginal utility of one to two sodas is two, whereas the marginal utility of two to three sodas is one, resulting in a 1.5 shift in utility between one and three.

Find the total utility of the first event

Finding marginal utility necessitates a comparison of two or more occurrences in order to arrive at an average. If the events require you to assign a value to buy prices, add each price together to determine the total utility of the first event.

Find the total utility of the second event

Take a look at the data acquired from the second event. Determine the quantity of products that will be replaced as well as the purchase price. To calculate the overall utility of the second event, add all purchases together.

Find the difference between both (or all) events

Gather the totals from both or all of the events and calculate the difference. The total utility difference for the formula is the result of the calculation.

Find the difference between the number of goods between both (or all) events

Add up all of the products you bought during the first event to reach a total. Next, gather all of the things purchased during the second (and any subsequent) events. To find a solution, subtract the totals from each other.

What is the total utility formula?

Economists use the following simple total utility calculation to find total utility: U1 + MU2 + MU3 = TU The sum of utils acquired from each unit of consumption equals total utility. As more units are eaten, each unit of consumption is projected to provide slightly less utility.

With an example, what is total utility and marginal utility?

Total utility refers to a consumer’s overall happiness as a result of consuming specific goods and services. Every single unit of products or services has its own marginal usefulness. The total utility of all such individual goods is equal to the sum of their marginal utilities.

What’s the connection between total and marginal utility?

When marginal utility drops, total utility increases at a decreasing pace, and when total utility reaches a maximum point, marginal utility is zero, and total utility begins to decline if marginal utility is negative.

How is the overall cost determined?

Total Cost = Total Fixed Cost + Average Variable Cost Per Unit * Number of Units Produced Total Cost = Total Fixed Cost + Average Variable Cost Per Unit * Number of Units Produced Total Cost = Total Fixed Cost + Average Vari

The entire cost of production is shown to be directly related to the level of production in this example.

Total Cost Formula Example #2

Let’s look at another scenario where the depreciation cost is $15,000 and the rental expenditures are $5,000. Raw material and labor costs per unit, on the other hand, are $4 and $2 per unit, respectively. Calculate the total cost of manufacturing based on the given information when the amount of production is:

Raw Material Cost Per Unit + Labor Cost Per Unit = Average Variable Cost Per Unit


Step 1: Determine the cost of production that is fixed in nature, i.e. the cost that does not fluctuate as the level of output changes. Selling expenses, rent expenses, depreciation costs, and other fixed costs of production are examples.

Step 2: Next, calculate the average variable cost per unit for those expenses that are affected by production volume. Labor costs, raw material costs, and so on are examples of variable costs of manufacturing.

Step 3: Next, figure out how much you’re going to make or how many units you’re going to make.

Step 4: Finally, add the product of average variable cost per unit (step 2) and amount of units produced (step 3) to the total fixed cost of production (step 1) to get the total cost formula, as shown below.

Relevance and Uses of Total Cost Formula

From the standpoint of production managers, understanding the idea of total cost of production is critical since it aids in the estimation of overall profit margin at various levels of production. Because the total fixed cost is unlikely to fluctuate over a shorter time period, the average variable cost per unit is the primary driver of the overall cost of production. The total fixed cost, on the other hand, is equally crucial because it is the sum of total fixed and total variable costs, which, when deducted from revenue, gives the company profit. As a result, the total cost formula is quite useful in any firm.

How can you figure out what the marginal cost is?

The change in total cost is divided by the change in quantity to calculate marginal cost. Assume Business A is manufacturing 100 units at a cost of $100 per unit. The company then builds an extra 100 units for $90 each. As a result, the marginal cost would be the $90 difference in total cost. The additional 100 units are divided by the change in quantity. As a result, the marginal cost equals $90/100, or $0.90 per unit.

Change in Total Cost

So, what does an increase in total cost imply? The marginal cost, on the other hand, considers the difference between two points of production. So, how much more does it cost to make one unit rather than two? By subtracting the total cost at point B from the total cost at point A, the change in total cost is computed.

What criteria do we use to evaluate utility?

The concept of utility refers to how much pleasure or enjoyment a person derives from a certain behavior.

Utility is drawn from utilitarianism’s philosophy. Jeremy Bentham, an early proponent of utilitarianism, maintained that value was the accumulation of pleasure and avoidance of misery.

Others, like as J.S. Mill, refined the concept by arguing that there are higher pleasures, such as a love of reading and culture. As a result, foregoing pleasure for the time being in order to learn could be a sensible method to maximize total utility.

We can try to quantify utility using a fictitious unit of measurement called utils. If you go to the grocery, for example, you might think that a bag of apples has a modest utility of 20 utils. A large pizza, on the other hand, may provide 50 utils of satisfaction.

It should be highlighted that calculating util is mostly a normative judgment. In actuality, people don’t think in terms of ‘utils,’ but rather make haphazard, heuristic decisions about what to buy.

What contributes to utility?

Traditionally, usefulness has been associated with the fulfillment of material desires or demands.

However, utility is not limited to the fulfillment of material desires; it can also stem from a range of emotions, such as a sense of altruism. For example, if you donate 10 to charity, you will lose money, but you will feel good about yourself.

Both acquisitional and transactional utility are described by behavioural economist Richard Thaler.

  • The joy we acquire from the purchase’s financial terms is known as transactional utility.

For example, if we pay 50 for a kettle, we gain the acquisitional utility of having one. However, if we see a kettle on sale for a year at 100 and then it is lowered to 50 one day, we are happier because we feel we got a good deal compared to what we expected to pay. The transactional utility is the feeling of receiving a good deal.

Measuring utility with respect to demand

Because utility is a subjective concept that varies from person to person, there are no meaningful means to assess it. The demand curve, on the other hand, can provide an approximate estimate of likely utility. In his book Principles of Economics (1920), Alfred Marshall writes:

“In those circumstances where economics is most concerned, the measure is found in the price which a person is prepared to pay for the fulfillment or satisfaction of his desire.”

This illustrates how a demand curve for a single item can disclose the marginal utility we would assign to quantities of that item.

We might be willing to spend 10 for one unit of the good because we believe we get a utility of ten utils. However, because the utility of a second quantity of the good may be lower, we are only willing to pay 9. The output of our second unit is lower than that of the first.

If a pizza costs 8, you may determine that it is worthwhile to purchase it. To put it another way, the benefit of eating the pizza outweighs the expense. You would not buy it if it cost 10. Similarly, spending 20 on a Sirloin steak implies that we value steak more than pizza.

Paul Samuelson is the author of this hypothesis. People’s readiness to pay implied the relative utility of their choices, according to the study. It’s a more detailed approach to creating utility functions based on user behavior.

Cardinal vs Ordinal utility

The assumption is that utility can be measured in numerical units, such as 5 utils.

Neo-classical economists such as Alfred Marshall, Leon Walrus, and Carl Menger established and applied the concept of cardinal utility. They all worked on utility, presuming that it could be quantified in some way.

Ordinal utility attempts to rank choices in terms of preference, which simplifies measurement. We prefer A to B, for example, but we can’t tell how much in cardinal terms.

It is stated that in the real world, people do not assign specific utility ratings to various possibilities. Instead, we prefer different packages; for example, we may prefer steak over lamb, but we don’t specify how much we like the steak.

Wilfred Pareto introduced ordinal utility in 1906, and John Hicks developed it.

Marginal utility

  • Economists frequently discover that consuming more units of a good has a falling marginal utility.
  • In summary, the first slice of cake has a high utility, while the second piece has a lower utility.
  • The law of declining marginal returns was developed by Carl Menger, who was influential in its development.

As the quantity of water increases, the marginal utility of water decreases dramatically. Water’s lifetime marginal utility is more consistent.

Expected utility hypothesis

This is an attempt to assign a utility to an unclear decision. Daniel Bernoulli was the first to notice it in 1738. “Specimen theoriae novae de mensura sortis” “Specimen theoriae novae de mensura sortis”

A lottery ticket worth 10 If the game is repeated an infinite number of times with a 2% chance of winning 200, the expected value of the stake is 4 10. 6.

In a straight bet, however, the expected utility may differ from the expected value.

  • If you enjoy taking chances (feel lucky), you could be willing to lose 10 in exchange for a chance to win 200.
  • If you’re afraid of taking chances. You could pay 10 to protect yourself from a catastrophic loss, even if the chances are slim.

In their formulation of game theory, John von Neumann and Oskar Morgenstern adopted the assumption of expected utility maximization.

Criticism of Utility theory

1. The concept of a circle. Joan Robinson claimed that utility is a meaningless concept. Utility theory is essentially a tautology.

“The trait in commodities that makes people want to buy them is utility, and the fact that people desire to acquire commodities indicates that they have utility.”

2. Preferences and values can shift throughout time. We prefer steak to lamb today, but lamb to steak next week.

3. Individuals may engage in unreasonable behavior. People may, for example, prefer a hard mattress to a soft mattress while also preferring a soft mattress to a hard mattress.

What is an example of marginal cost?

All costs that fluctuate with the degree of production are included in the marginal cost of production. For instance, if a corporation needs to construct a completely new facility in order to create more goods, the cost of doing so is a marginal cost.

What is the formula for calculating economic costs?

While there are many different types of accounting, they all have one thing in common: accounting expenses.

In simple terms, an accounting cost is any expense that comes out of your bank account.

While calculating accounting costs is a need for any organization, large or small, estimating economic costs, while not a requirement, can be a useful tool when making business decisions.

Economic cost enables you to examine a number of “what-if” scenarios and determine how they might impact your organization and bottom line.

At a glance: How economic cost and accounting cost work

  • Subtract your expenses from your revenue to calculate accounting cost.
  • By deducting hidden expenses from your accounting cost, you can compute economic cost.