Utility

Utility

Something of value, but upon receiving it in abundance the value is decreased.

Scenario 1: If there is an individual who loves chocolate, in theory the more chocolate they receive, the happier they will be. However, after a few pieces of chocolate, the craving is satisfied and now each additional piece of chocolate will feel less and less enjoyable.

Scenario 2: When eating a pizza, we can give the satisfaction of eating the first slice a score of 100. With each proceeding slice that score will drop systemically until the joy of eating a slice will grant the consumer no joy or even negative joy.

These are the confines wherein Diminishing Marginal Utility can be illustrated the best.

Definition

The word utility can be defined as the value something has in a given context.

The law of diminishing marginal utility states that “when we consume more and more units of a particular commodity, the utility derived from consumption of an additional unit diminishes.

This is why each piece of pizza eaten after that first mouthwatering piece gave less joy to the consumer as they continued eating. If you were to graph this pizza intake with the level of joy each slice brings, the curve in the graph would be sloped downwards. This line in decline is called the marginal utility curve.

Deep Analysis

“Utility” refers to how useful something is in a given context.

So if you were to be stranded and dehydrated in the Sahara Desert, a bottle of water would be worth its weight in gold, but that same bottle of water offered in the middle of an Ozark bottling plant would be worthless to you.

Practical use of Diminishing Marginal Utilities can be applied to past and current systems such as taxation.

The U.S. tax system is progressive. A decrease of $5000 for someone making $40,000 per annum is more damaging than to someone who is making $1,000,000 per annum. Hence the tax law suggests levying a higher tax on rich and lower tax on poor as to make equal marginal sacrifices

Another prime example would be Price Determination.

Consumers do not want to pay a higher price for an additional unit. We know that their utility goes down with each additional unit.

So if a brand is looking to increase its sales, it can employ an attractive strategy like buy one get one free. This might be their best bet for quickly appealing to the customer, hooking them in.

Applications in Education

The same can be said when we apply Diminishing Utility Value to information. If someone has specialized in a field and continues to read book after book pertaining to their field, the value each book provides becomes less and less valuable. As the consumer’s expertise grows, he is taking less and less from each new book on the same subject.

A book on a foriegn subject should be worth more since that knowledge is unknown to the individual.

Successful investors and entrepreneurs usually have a high “need for cognition,” but more is not always better.  If you’re too interested in solving hard problems, you’ll start solving problems for the sake of solving hard problems without worrying about the practical utility.

Interestingly enough though there are two examples where Diminishing Utility Value does not necessarily apply to the human condition.

Number one would be money. Typically speaking the more money one has, the more money they will want. The other would be addictive substances; a person drinking alcohol derives more joy on his second peg than the first.

The joy increases with more pegs until he cannot consume anymore.

Applications in Business

Something relevant to Utility Statistics, The Pareto Principle is often brought up when dealing with operations management and other similar fields.

It’s not necessarily just a mathematical law but a truth in humanity, the idea being that 20% of our actions dictate 80% of the results.

Throughout your life, you have encountered an incredible amount of people who have influenced you in certain ways and passed on skills that you deem valuable and apply to this very day. It can be surmised then that value is relative to everyone, but at the core of what we deem valuable, actions, interactions, and developing skills remain the constant.

The takeaway is that you should be funding actions and relationships which perpetuate true value. This mentality should remain a constant when being advised about your business. Maybe the value of outside advice can diminish as you gain experience with your business. But ultimately it is better to have more advice than you need, as you can then refine the lessons learned as time goes on.

Sometimes the most insightful advice can come from the least expected avenues.

With your newfound success in business, you might be reaping some very generous rewards.

Greed is greed, but no one can deny, more money, more freedom!

Money is one of the cases where Diminishing Utility value might not apply. It is true most people would want to make as much money as possible and every cent can be valued as much as the last cent made.

However, when it comes to happiness, having more money when you are already rich will not increase your happiness. To a poor person, money is seen as a way to improve one’s day-to-day living conditions and alleviate the stress and worry of being flat broke. Once an individual has reached financial security and is able to live off their surplus of money, you will see their happiness quickly plateau.

This may be because having one billion dollars comes with a lifestyle that is not too that much more interesting or exciting than that of someone who has 10 billion in the bank.

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