Holt 7525-9 S15_IT

Example 3: To illustrate marginal utility, let’s say that Jan eats one slice of pizza and receives 50
utils of satisfaction. Then Jan eats additional slices, and experiences the following results:
Slices of Pizza Total Utility Marginal Utility
0 0 utils X
1 50 utils 50 utils
2 90 utils 40 utils
3 115 utils 25 utils
4 120 utils 5 utils
As Jan eats additional slices of pizza, each additional slice adds less to her total utility. Thus the
marginal utility of each additional slice decreases (diminishes). Jan is experiencing the law of
diminishing marginal utility.
Law of diminishing marginal utility – the marginal utility from consuming additional units of a
good eventually declines.
This law assumes that consumption takes place over a relatively short period of time. If the
second slice of pizza is eaten a week after the first slice, the second slice may be just as
satisfying as the first slice. The law of diminishing marginal utility is important for understanding
consumer behavior. If there were no law of diminishing marginal utility, consumer behavior would
be very different than it actually is.
Example 4: If your favorite food is apples and you have $50 to spend on groceries, you would
spend the entire $50 on apples, if there were no law of diminishing marginal utility. The fiftieth
dollar spent on apples would yield just as much marginal utility as the first dollar spent on apples,
and more marginal utility than a dollar spent on any other grocery item. But there is a law of
diminishing marginal utility. Once you have consumed a few apples, you will receive more
marginal utility from buying something else with your next dollar rather than more apples. So you
purchase a variety of groceries, apples, oranges, bread, milk, eggs, etc.
Diminishing Marginal Utility and Income Distribution
Because of scarcity, it is not possible to satisfy all human wants. The basic goal in dealing with
scarcity is to produce as much consumer satisfaction as possible with the limited resources
available. Or, the basic goal is to produce as much total utility for society as possible. A market
economy contributes toward achieving this goal by giving resource owners the incentive to
produce the output that generates the most satisfaction for the consumers. The output that
generates the most satisfaction for the consumers will also generate the most income for the
resource owners. However, a market economy also results in an unequal distribution of income.
The distribution of income in the U.S. economy is unequal. Those with much income can afford
goods that give them a great deal of marginal utility and also goods that give them little marginal
utility. Those with little income may be unable to afford goods that would give them a great deal of
marginal utility. Does the unequal distribution of income mean less total utility for society? Would
redistributing income from those with more income to those with less income increase total utility
for society? The law of diminishing marginal utility seems to indicate that it would.
Example 5: Max has annual income of $200,000. Minnie has annual income of $10,000. Which
person would gain more marginal utility from an extra $100 of income? The law of diminishing
marginal utility seems to indicate that Minnie would.
But the law of diminishing marginal utility does not actually indicate which person would receive
greater marginal utility from additional income. Utility cannot be measured objectively. There is no
objective way to measure or to compare the marginal utility that Max and Minnie would receive
from an extra $100 of income. Thus, marginal utility cannot be scientifically compared for different
persons.
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Utility 18 - 2