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I read this in high school and years later in university learned economists named this concept 'marginal utility.' It's an important concept to understand in m

by mtempm 9y ago

I read this in high school and years later in university learned economists named this concept 'marginal utility.' It's an important concept to understand in many aspects of life. In social and economic policy, it's important to remember resources are allocated per marginal utility, not by what they're worth. I.E. water is worth more to me than music, but I spend more money on music than water, and the music industry makes more than public water utilities. Seems obvious when stated like that, but it's often forgotten I find.

udkl 9y ago
Ivestopedia has a different definition - "Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important economic concept because economists use it to determine how much of an item a consumer will buy." http://www.investopedia.com/terms/m/marginalutility.asp http://www.investopedia.com/terms/m/marginalutility.asp
rubyn00bie 9y ago
He's not talking about marginal utility. At least not unless he's talking about an extremely unusual utility function. Maybe my Econ background is getting in the way but... Marginal utility, would be the increasing/decreasing value at the margins, for each additional screw. Here I believe the point is in process engineering that more or less, something big may be disguised as something small. That you must thoroughly know your process to understand the problem(s) at hand. It seems more analogous to "the straw that broke the camels back."
- mtempm 9y ago
  It is about marginal utility. You and others here are constraining yourself to thinking about the concept by thinking about it only as a utility function for one type of product or service. After all, that is how it is taught. You can also think about the marginal utility of one glass of water, or one screw in a more complex utility function (as is always the case in life) than for just one widget, as you would say a factory manufacturing screws until cost > utility. After all, it's nothing more than the utility you gain, on the margin (holding all else constant), of that one additional screw or glass of water. In the author's example, he is discussing this exact phenomenon. The utility at the margin of that one additional screw.
  - rubyn00bie 9y ago
    I politely disagree. This example feels like a piece wise function which isn't a utility function (or at least not one I have ever seen and I've seen a lot). Having utility decrease from its maximum to zero, or negative, at the next value is odd to say the least.
    - mtempm 9y ago
      >Having utility decrease from its maximum to zero, or negative, at the next value is odd to say the least I didn't claim anything such as this and I'm having trouble understanding what you are responding to in my post. A utility function is just a value of utility received at different quantities and costs. They are just basic models for helping to simplify our understanding the world. There's no need to begin comparing expertise with utility functions. The author is talking about the utility he receives at the margin of one additional widget in his decision making process, and what that this type of scenario (when a commonly cheap item can, in our decision making process, can have a high marginal utility--ie quantity is only 1 and 1 is necessary for a finished product) means to us in our human experience.
      - rubyn00bie 9y ago
        From the quote that started all this: "Right now this screw is worth exactly the selling price of the whole motorcycle ..." This is not marginal utility as somehow the value of this screw is equal to the entire amount of the motorcycle. There is no marginal utility to be had because decreasing it or increasing it has no effect. This would not be a continuous function. You could talk about the marginal utility of one having a motorcycle or no motorcycle. It's not related to the increase in screws. Additionally, to say that expertise in a subject is not needed is perplexing to me. So much so I literally can't begin to understand how you'd surmise such a claim honestly. How much economics did you take? I ask because it sounds like your understanding is that from a class or two, and not the bulk of your education. I think if it was we would not be having this discussion or you'd somehow prove it instead of reiterating the same points.
anigbrowl 9y ago
It's an important concept but it's not marginal utility. Marginal utility is the degree to which adding one more of something will exceed the cost of doing so. To stick with the motorcycle analogy, suppose I am designing a motorcycle as a manufacturer and I find that it takes 6 bolts to securely fix the engine to the frame. If I use fewer, accidents are very likely to occur, I will get sued, sales will collapse. As it is, accidents will still occur once a year - but that's the industry average (let's say) so I can pay out compensation for that one accident without seeing any real impact on sales. (I have magic litigation insurance so my liability costs are totally predictable for this example.) Suppose each bolt costs me $10. If I add 8 bolts, the risk of failure drops to zero. I calculate the cost of accident involving my bike, divide it by the number of bikes I expect to sell, and I find it's about $25 per bike; installing those two extra bolts creates $5 of marginal utility or 2.50 each so I go ahead and do it. Should I not go ahead and add 1 more bolts? No, because it will cost an additional $10 for no noticeable increase in safety, so the marginal utility is -$10.
- julian_1 9y ago
  > to which adding one more of something will exceed the cost of doing so. No. That's marginal cost.
  - Kluny 9y ago
    I think you've got to expand on that. Just "No, it's [other thing]" kills the conversation.
    - julian_1 9y ago
      Marginal utility is a consumption function. By itself, it says nothing about cost or what a producer will do, > In economics, utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility of a good or service is the change in the utility from an increase in the consumption of that good or service. https://en.wikipedia.org/wiki/Marginal_utility https://en.wikipedia.org/wiki/Marginal_utility By contrast, marginal cost is about change in a producer's cost function with changes in quantity, > marginal cost is the change in the opportunity cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good. https://en.wikipedia.org/wiki/Marginal_cost https://en.wikipedia.org/wiki/Marginal_cost The commenter starts out using the word "cost" along with the rest of his example which is elaborated upon to describe the MC=MR profit maximizing function.
richardw 9y ago
Personally I think that's just supply and demand. Water is plentiful and the costs of access are low (at least when there's a tap nearby). So even though it's extremely important it's not too limited a resource...now. In the future, that will change for many people in the world. There are predictions of wars about water [1], but there won't be many wars about music. Demand increasing for water, harder-to-increase supply. [1] http://bigthink.com/re-envision-toyota-blog/will-the-next-war-be-fought-over-water http://bigthink.com/re-envision-toyota-blog/will-the-next-wa...

by mtempm 9y ago

udkl 9y ago

Ivestopedia has a different definition - "Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important economic concept because economists use it to determine how much of an item a consumer will buy." http://www.investopedia.com/terms/m/marginalutility.asp http://www.investopedia.com/terms/m/marginalutility.asp

rubyn00bie 9y ago

He's not talking about marginal utility. At least not unless he's talking about an extremely unusual utility function. Maybe my Econ background is getting in the way but... Marginal utility, would be the increasing/decreasing value at the margins, for each additional screw. Here I believe the point is in process engineering that more or less, something big may be disguised as something small. That you must thoroughly know your process to understand the problem(s) at hand. It seems more analogous to "the straw that broke the camels back."

mtempm 9y ago
It is about marginal utility. You and others here are constraining yourself to thinking about the concept by thinking about it only as a utility function for one type of product or service. After all, that is how it is taught. You can also think about the marginal utility of one glass of water, or one screw in a more complex utility function (as is always the case in life) than for just one widget, as you would say a factory manufacturing screws until cost > utility. After all, it's nothing more than the utility you gain, on the margin (holding all else constant), of that one additional screw or glass of water. In the author's example, he is discussing this exact phenomenon. The utility at the margin of that one additional screw.
- rubyn00bie 9y ago
  I politely disagree. This example feels like a piece wise function which isn't a utility function (or at least not one I have ever seen and I've seen a lot). Having utility decrease from its maximum to zero, or negative, at the next value is odd to say the least.
  - mtempm 9y ago
    >Having utility decrease from its maximum to zero, or negative, at the next value is odd to say the least I didn't claim anything such as this and I'm having trouble understanding what you are responding to in my post. A utility function is just a value of utility received at different quantities and costs. They are just basic models for helping to simplify our understanding the world. There's no need to begin comparing expertise with utility functions. The author is talking about the utility he receives at the margin of one additional widget in his decision making process, and what that this type of scenario (when a commonly cheap item can, in our decision making process, can have a high marginal utility--ie quantity is only 1 and 1 is necessary for a finished product) means to us in our human experience.
    - rubyn00bie 9y ago
      From the quote that started all this: "Right now this screw is worth exactly the selling price of the whole motorcycle ..." This is not marginal utility as somehow the value of this screw is equal to the entire amount of the motorcycle. There is no marginal utility to be had because decreasing it or increasing it has no effect. This would not be a continuous function. You could talk about the marginal utility of one having a motorcycle or no motorcycle. It's not related to the increase in screws. Additionally, to say that expertise in a subject is not needed is perplexing to me. So much so I literally can't begin to understand how you'd surmise such a claim honestly. How much economics did you take? I ask because it sounds like your understanding is that from a class or two, and not the bulk of your education. I think if it was we would not be having this discussion or you'd somehow prove it instead of reiterating the same points.

anigbrowl 9y ago

It's an important concept but it's not marginal utility. Marginal utility is the degree to which adding one more of something will exceed the cost of doing so. To stick with the motorcycle analogy, suppose I am designing a motorcycle as a manufacturer and I find that it takes 6 bolts to securely fix the engine to the frame. If I use fewer, accidents are very likely to occur, I will get sued, sales will collapse. As it is, accidents will still occur once a year - but that's the industry average (let's say) so I can pay out compensation for that one accident without seeing any real impact on sales. (I have magic litigation insurance so my liability costs are totally predictable for this example.) Suppose each bolt costs me $10. If I add 8 bolts, the risk of failure drops to zero. I calculate the cost of accident involving my bike, divide it by the number of bikes I expect to sell, and I find it's about $25 per bike; installing those two extra bolts creates $5 of marginal utility or 2.50 each so I go ahead and do it. Should I not go ahead and add 1 more bolts? No, because it will cost an additional $10 for no noticeable increase in safety, so the marginal utility is -$10.

julian_1 9y ago
> to which adding one more of something will exceed the cost of doing so. No. That's marginal cost.
- Kluny 9y ago
  I think you've got to expand on that. Just "No, it's [other thing]" kills the conversation.
  - julian_1 9y ago
    Marginal utility is a consumption function. By itself, it says nothing about cost or what a producer will do, > In economics, utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility of a good or service is the change in the utility from an increase in the consumption of that good or service. https://en.wikipedia.org/wiki/Marginal_utility https://en.wikipedia.org/wiki/Marginal_utility By contrast, marginal cost is about change in a producer's cost function with changes in quantity, > marginal cost is the change in the opportunity cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good. https://en.wikipedia.org/wiki/Marginal_cost https://en.wikipedia.org/wiki/Marginal_cost The commenter starts out using the word "cost" along with the rest of his example which is elaborated upon to describe the MC=MR profit maximizing function.

richardw 9y ago

Personally I think that's just supply and demand. Water is plentiful and the costs of access are low (at least when there's a tap nearby). So even though it's extremely important it's not too limited a resource...now. In the future, that will change for many people in the world. There are predictions of wars about water [1], but there won't be many wars about music. Demand increasing for water, harder-to-increase supply. [1] http://bigthink.com/re-envision-toyota-blog/will-the-next-war-be-fought-over-water http://bigthink.com/re-envision-toyota-blog/will-the-next-wa...