Every person wants to maximize their whole benefit in consuming. When they buy a good they want the benefit to be the greatest it can possibly be. There are a few different way to get a maximized utility and benefit completely from buying goods. One way is to allocate the whole budget. First the consumer can choose to put money into savings and also make the appropriate payments but the money left over should be all spent on goods and services. If you spend all your money you are more likely to get the greatest amount of utility from consuming the most amounts of goods. The second way to maximize utility is to make sure that marginal utility is the same per dollar for all goods. Basically, if the consumer feels more benefit from one good over another they should consume more of that good rather than another. For example if the marginal utility of milk is 8 and the marginal utility of incense is 4, than the consumer should consumer more milk and less incense so they will completely maximize their utility.
This concept also goes along with the Paradox of Value. The Paradox of Value is the difference between total utility and marginal utility. Total utility tells us about value where marginal utility tells us about price. An example is water and diamonds. Water has a high total utility and a low marginal utility where diamonds has a low total utility and a high marginal utility.
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I agree. Consumers should maximize their total utility so that they will be completely satisfied with the goods they purchase. If you are happier purchasing milk over incense, why buy more incense than milk? Its really just a matter of common sense.
ReplyDeleteYou would think that people would have common sense and consume stuff with the most utility; however this isnt always the case. This creates a problem when economist try to make calculations. People can be irrational buyers. I saw an example of this the other day when I saw a $70K car in the driveway of a $90K house. It doesnt make sense to buy a car that provides very little marginal utility.
ReplyDeletePeople are rarely rational, especially when it comes to buying. People's likes increase their own personal idea of "utility." It's always interesting to see how people chose to spend their money. That's why the Paradox of Value is interesting to me, because water is technically the most valuable good to us, yet it is so cheap.
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