Our experiment in DIMINISHING MARGINAL UTILITY was, once again, a success. This is the principle upon which buffet restaurants operate. They offer "all you can eat" at what seems like a very fair price, knowing all the time that the law of diminishing utility guarantees that, with each subsequent trip to the food island (each next unit of consumption), you will gain less satisfaction. As we see from our gracious volunteers (last year's plus this year's), the decline is different with each person, but unless some part of one's brain is cut away, everyone will obey the law.
Do remember, that there is a difference between TOTAL UTILITY (TU) and MARGINAL UTILITY (MU). Total utility is the psychological satisfaction a consumer derives from consuming a given amount of a particular good or service. It is calculated by obtaining the sum of all the marginal utilities gained from consuming the different units of a commodity. So, for instance: one of this year's volunteers ate four chocolate bars; the sum of her marginal utilities is 9.5 + 7.5 + 5 + 1.5 = 23.5 Utils (ten-point scale).
Marginal UTILITY (MU), on the other hand, is the amount of psychological satisfaction a consumer gains from consuming one more unit of a good or service. There is a simple formula for calculating marginal utility; it is expressed as: MU = Change in Total Utility / Change in quantity. If, then, we look at the example above, we see that total utility increased from 9.5 to 17 with the consumption of the second candy bar, one more candy bar, then marginal utility is 7.5 because 17 minus 9.5 = 7.5 / 1 = 7.5. A quick glance at the graph would confirm that this is so.
Remember, that we established our definition of a util based on an arbitrary scale running from 0 to 10.
Now, what does all of this mean? Well, there are some serious implications for both consumers and producers. Consumers can stop wondering why it is that, after a while, they get tired of the "same old same old" and desire something new, improve, different, etc. ... the law of diminishing utility explains the phenomenon. As for producers, the economists and psychologists who work for companies understand that a product will, over time, lose its appeal at a predictable, calculable and reliable rate. The trick is then, to "tweak" the product so that it is "new," "improved," or has a new package design, lower price point, or "more." In this way, consumers' utility curve can be bent back upwards, at least for awhile.
For more on utility and marginal utility, see this excellent article.
HBS: 9/16/2014
Do remember, that there is a difference between TOTAL UTILITY (TU) and MARGINAL UTILITY (MU). Total utility is the psychological satisfaction a consumer derives from consuming a given amount of a particular good or service. It is calculated by obtaining the sum of all the marginal utilities gained from consuming the different units of a commodity. So, for instance: one of this year's volunteers ate four chocolate bars; the sum of her marginal utilities is 9.5 + 7.5 + 5 + 1.5 = 23.5 Utils (ten-point scale).
Marginal UTILITY (MU), on the other hand, is the amount of psychological satisfaction a consumer gains from consuming one more unit of a good or service. There is a simple formula for calculating marginal utility; it is expressed as: MU = Change in Total Utility / Change in quantity. If, then, we look at the example above, we see that total utility increased from 9.5 to 17 with the consumption of the second candy bar, one more candy bar, then marginal utility is 7.5 because 17 minus 9.5 = 7.5 / 1 = 7.5. A quick glance at the graph would confirm that this is so.
Remember, that we established our definition of a util based on an arbitrary scale running from 0 to 10.
Now, what does all of this mean? Well, there are some serious implications for both consumers and producers. Consumers can stop wondering why it is that, after a while, they get tired of the "same old same old" and desire something new, improve, different, etc. ... the law of diminishing utility explains the phenomenon. As for producers, the economists and psychologists who work for companies understand that a product will, over time, lose its appeal at a predictable, calculable and reliable rate. The trick is then, to "tweak" the product so that it is "new," "improved," or has a new package design, lower price point, or "more." In this way, consumers' utility curve can be bent back upwards, at least for awhile.
For more on utility and marginal utility, see this excellent article.
HBS: 9/16/2014