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AOF Business Economics. Unit 2, Lesson 4 Utility and the Law of Diminishing Returns. “Too much of a good thing” is an economic concept. Why does a cold drink taste so good after playing sports? Why doesn’t the second drink taste quite as good as the first? And the third even less appealing?

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too much of a good thing is an economic concept
“Too much of a good thing” is an economic concept
  • Why does a cold drink taste so good after playing sports?
  • Why doesn’t the second drink taste quite as good as the first?
    • And the third even less appealing?
    • And the fourth? Not unless you want to get sick.

Picture of Sweaty Basketball player drinking

The answers are utility, marginal utility, and diminishing marginal utility.

economics measures the value a good provides
Economics measures the value a good provides
  • Marginal Utility:

The amount of value one more instance of an item will give us

  • Diminishing Marginal Utility:

The decline in the amount of value each additional instance of an item brings when consumed in a given time period

  • Total Utility:

The sum of all value gained from the consumption of all instances of an item

utility can help businesses make decisions
Utility can help businesses make decisions
  • Gatorade factory tries to produce the right amount of Gatorade to satisfy the thirsty kids’ wants.
  • It wants to do this while earning as much money as possible.
  • So how many workers should the factory hire?
  • If you hire too many and produce too much, the price could !