Ultimate Utility

Ultimate utility is the amount of added utility that is added to the consumption of each successive unit of good. The very concept of utility, despite its abstract character, has long been used in economic theory to determine the degree of pleasure, satisfaction, or benefit that people derive from the consumption of certain goods.

The theory of marginal utility arose in the second half of the 19th century as an alternative to the concept of labor theory of value. It was developed by representatives of the Austrian school: E. Böhm-Bawerk, K. Menger, J. Schumpeter, F.F. Wieser, as well as A. Marshall, US Jevons and L. Walras.

Its essence lies in the fact that the main factor affecting the value of a commodity is its marginal utility, which depends, in turn, on a person's subjective assessment of his needs. For clarity, consider the following example. Suppose a millionaire got into the Sahara Desert and at a temperature of about 40 ° is very thirsty. In the pocket of his trousers is a handful of diamonds. And then there is a Bedouin with a water-purse and offers to exchange diamonds for water. What in this case will be of great value to a person? Obviously, water, as without it, he risks dying.

Let's take another example. Imagine that on a hot July day, a kiosk with ice cream caught your eye and you decided to purchase one package. Then, having eaten the first portion, bought yourself a second one, because you want more ice cream, although not so much. After the second package, you start to think: to buy a third or not. And if someone offers to eat the fourth or fifth, then you are unlikely to agree. This example describes the law of diminishing utility, which states that as the need for a person is saturated , the utility of the thing for it decreases.

Supporters of the theory of marginal utility believe that the consumption of any product or service is "incremental" for a person. This means that the buyer, as a rule, is not guided by the principle of "all or nothing", but gradually increases the number of consumed goods or services, until it satisfies its need.

Thus, knowing what marginal utility is, we can draw three main conclusions:

1. For the consumer, each additional commodity carries an additional utility, which is commonly called "marginal".
2. The more quantity of goods the buyer has had time to consume, the less useful each subsequent unit of this product has for him. Thus, it can be safely asserted that marginal utility has a decreasing character. And between the value of the product and marginal utility there is an inverse relationship. Its essence lies in the fact that the less a quantity of goods (goods) a person has, the more valuable this product is to him. It turns out that its value is determined by the degree of utility that the last unit of this good has, capable of satisfying the least actual need.
3. When you consume a certain number of units of a product (for example, ice cream), a person receives a sum of utilities that decrease with each time. In economic theory, it is customary to call the conventional unit of marginal utility "utilit". If the consumption of the first ice cream will give a person usefulness in 7 juts, the second - 6, the third - 5, and the fourth - 4 yutil, then the total utility of these products will be equal to 22 yutiles (and the marginal utility will be 4 yutils). Refusal of each regular portion of ice cream will represent a decrease in the total (overall) utility and simultaneous increase in the marginal utility of the last package. For example, if a person refuses a fourth dose, the total utility (TU) will be 18 units, and the marginal utility (MU) will be 5, with the refusal of the third serving, TU will be 13 units, and the MU will increase to 6, etc. .