There are two types of utility, namely;

19. Total utility (TU)
19. Marginal utility (MU)

1. Total Utility (TU)

It is the total or the whole satisfaction derived from consuming a good or service at a particular time and place. As soon as we start consuming a good or service, our total utility will increase up to a point where it remains constant or the same. This is the maximum point of satisfaction.

2. Marginal utility (MU)

It is the satisfaction derived from the consumption of an additional or extra unit of a good or service. As soon as we start consuming a good or service, our marginal utility starts falling until it reaches a point where it becomes zero (0). That is the maximum point of satisfaction.

The Relationship between Total and Marginal Utility

• When we start to consume a good or a service, total utility is increasing while marginal utility is decreasing.

• When total utility is constant (the same), marginal utility is zero. That is, maximum point of satisfaction or point of satiety.

• When total utility starts falling, marginal utility becomes negative. That is the point of dis-utility.

Table Showing the Relationship between Total Utility and Marginal Utility

Marginal utility is calculated as:

Marginal Utility=Change in Total utility (∆TU)Change in units consumed (∆U)

A graph showing the relationship between total utility and marginal utility

THE LAW OF DIMINISHING MARGINAL UTILITY

This law states that “As a person consumes, more and more of a commodity the extra satisfaction obtained from each additional unit consumed decreases continuously. For example, the first bottle of water consumed provides the highest satisfaction than the second and sequence ones.

From the above table, when the consumer consumes the first loaf of bread, his marginal utility (MU) is 10, the second decreases to 8, the third falls to 7 and so no up to the point where MU is zero (0) (Point of satiety). Negative MU occurs at the consumption of the seventh loaf. This indicates negative satisfaction (dis-utility).

THE BASIC ECONOMIC PROBLEMS OR THE BASIC PRODUCTION DECISIONS

The kind of economic problem with which the economists deal with may be summarized in four questions:

6. What to produce?
6. How to produce?
6. Where to produce
6. For whom to produce?

1. What to Produce?

The economists must decide what goods and services to produce, with the limited resources, their quality and quantity. This is referred to as output question.

2. How to Produce?

The method of production should be known, are we going to use more labour and less capital or less labour and more capital. This is the input question or the problem of combination of factors of production (land, labour, capital and entrepreneur).

3. Where to Produce

This means deciding on the place where production can be carried. This is location of industries, firms or factories.

4. For whom to Produce?

This is the problem of distribution. The consumers of goods have to be consumed are the goods and services being produced for local or foreign consumption or market?

These basic economic problems are faced by entrepreneur or business person and the government in every economy.

The entrepreneur or business persons will decide on the type of goods to produce and the amount to produce depending on the resources at their disposal, where to produce depending on the raw materials needed and lastly in those in need of those goods who are willing to pay for them.

The government on the other hand decides on the types of projects to undertake and where the projects will be located or shall be provided depending on the needs of the citizens. Finally, the government decides on how to distribute these projects in various parts of the country.