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Unit 2, Lesson 4 Utility and the Law of Diminishing Returns

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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Unit 2, Lesson 4 Utility and the Law of Diminishing Returns

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  1. AOFBusiness Economics Unit 2, Lesson 4Utility and the Law of Diminishing Returns

  2. “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.

  3. 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

  4. At a certain point, consuming more of something provides no extra benefit

  5. 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 !

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