AOF
Business Economics
Unit 2, Lesson 4
Utility and Diminishing Returns
Copyright © 2008–2016 NAF. All rights reserved.
“Too much of a good thing” is an economic concept
•
•
•
•
Why does a cold drink taste
so good after playing
sports?
Why doesn’t the second
drink taste quite as good as
the first?
And the third even less
appealing?
And the fourth? Not unless
you want to get sick.
Picture of Sweaty Basketball
player drinking
Have you had “too much of a good thing” recently? What was it
and when did it become too much? Why?
Economics measures the value a good provides
•
•
•
Marginal Utility:
The benefit that one more of
something will give us, and
what we’re willing to pay for it
Diminishing Marginal
Utility:
The decline in the benefit that
each additional instance of
an item brings us when
consumed
Gatorades
Consumed
Marginal
Utility
of Each
Gatorade
Total Utility
of the
Gatorades
Consumed
0
$0
$0
1
$ 1.59
$ 1.59
2
$ 0.99
$ 2.58
3
$ 0.10
$ 2.68
4
$ 0.02
$ 2.70
5
$0
$ 2.70
Total Utility:
The sum of all the benefit gained from consuming all the
instances of an item
At a certain point, consuming more of something
provides no extra benefit
Sports Drink Marginal Utility
$3.00
$2.50
$2.00
$2.70
$1.59
Value $1.50
$1.00
$2.70
$2.68
$2.58
$1.59
$0.99
$0.50
$0.10
$-
1
2
3
Number of
Drinks
$0.02
4
$5
Marginal Gatorade Utility
Utility can help businesses make decisions
•
The Gatorade factory tries to produce the right
amount of Gatorade to satisfy the wants of
thirsty kids.
•
It wants to do this while earning
as much profit as possible.
•
So how many workers should the
factory hire?
•
If you hire too many workers and
produce too much Gatorade, the
price could decrease!