Unit 2, Lesson 4 Utility and Diminishing Returns AOF Business Economics Copyright © 2008–2011 National Academy Foundation. 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 The answers are utility, marginal utility, and diminishing marginal utility.

Economics measures the value a good provides Marginal Utility: The benefit that one more instance of an item will give us (when consumed in a certain time period, e.g. a day), and therefore what we’re willing to pay for it Diminishing Marginal Utility: The decline in the benefit that each additional instance of an item brings when consumed Total Utility: The sum of all the benefit gained from the consumption of all the instances of an item, in the same time period (as indicated by what we’re willing to pay for them) Gatorades Consumed Marginal Utility of Each Gatorade Total Utility of the Gatorades Consumed 0 $ 0 1 $ $ 0.99 $ $ 0.10 $ $ 0.02 $ $ 0 $ 2.70

At a certain point, consuming more of something provides no extra benefit

Utility can help businesses make decisions Gatorade factory tries to produce the right amount of Gatorade to satisfy the thirsty kids’ wants. 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 and produce too much, the price could !