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Microeconomic Theory

Notes In Fig. 3.1(B) MU curve represents Marginal Utility. It moves downward from left to right, which
signifies that marginal unit of successive units, goes on vanishing. Upto the fourth unit of the commodity,
marginal utility goes on vanishing while Total utility goes on increasing. Hence it is proved that upto
the fourth unit of the commodity marginal utility is positive. At the fifth unit where MU touches
OX-axis, Marginal utility is Zero. In such a case the total utility is maximum. After the fifth unit the
MU curve intersects OX-axis and moves downwards. This suggests that the sixth unit yields negative
Marginal utility and in this situation the total utility begins to diminish.

Self Assessment

Fill in the blanks:
1. Utility refers to the total ....................... received from consuming a goods or service.
2. Fisher has used the term ....................... as measure of utility.
3. Marginal utility is also known as ....................... utility.

3.4 Significance of the Difference between Total Utility
and Marginal Utility

The difference between Total Utility and Marginal Utility has the following practical significance:
1. Paradox of Value or the Diamond-Water Paradox: Many economists have assumed that the price
of a commodity was equal to its total utility. Thus the commodity, which gives more total utility
should have more value and vice versa. But it is not so in actual life. One obtains more total utility
from water than the diamonds, yet the price of water is much lesser than diamonds and this situation
is known as Paradox of Value or the Diamond-Water Paradox. Adam Smith has developed the
theory of the Diamond-Water Paradox as water is more important for the existence of life, yet it is
cheaper. Diamond is only aesthetic, but is very expensive. The neo-classical economist Jevons has
explained this paradox with the help of the difference between Total Utility and Marginal Utility.
He criticized Adam Smith by saying that he has forgotten that water is cheaper as it is found in
abundance, so its Total Utility soon reaches to the point of saturation. While the marginal utility
soon reaches to Zero. Consequently, the price of water is almost Zero. While on the flip side the
availability of diamond is very rare, so there total utility is far from the point of saturation. As
a result the marginal utility of diamond remains high and positive. The high marginal utility
corresponds with a relatively high demand price, so it is notoriously expensive.

A consumer pays price for a commodity, is not equal to its total utility but is equal to its Marginal utility. When the
consumption of commodity increases, the marginal utility decreases. So the consumer wants to pay less for every units
of commodity as compared to its first unit of commodity.

2. Consumer’s Surplus: Sometimes a consumer is ready to pay much higher price for a commodity
then its actual price. The difference between what consumers are willing to pay for goods or services
relative to its market price is known a consumer surplus. The consumer is ready to pay the price
which is equal to the total utility that he received from all of the commodities but in actual he pays
the price equal to the marginal utility of the marginal unit of the commodity. Here marginal unit is
refered to the additional unit that the consumer is ready to buy. Apart from this each unit preceding
the marginal unit (also known as intra marginal unit) would give the consumer more utility than
the marginal utility. The aggregation of marginal utilities of these units is known as Total utility.
As the price is equal to marginal utility, the amount of the money paid by the consumer is equal to
the marginal utility multiplied by number of the units bought. Of course, there will be a difference

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