Comment by anigbrowl | Hacker News Reader

Comment by anigbrowl | Hacker News Reader

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It's an important concept but it's not marginal utility. Marginal utility is the degree to which adding one more of something will exceed the cost of doing so.

To stick with the motorcycle analogy, suppose I am designing a motorcycle as a manufacturer and I find that it takes 6 bolts to securely fix the engine to the frame. If I use fewer, accidents are very likely to occur, I will get sued, sales will collapse. As it is, accidents will still occur once a year - but that's the industry average (let's say) so I can pay out compensation for that one accident without seeing any real impact on sales. (I have magic litigation insurance so my liability costs are totally predictable for this example.)

Suppose each bolt costs me $10. If I add 8 bolts, the risk of failure drops to zero. I calculate the cost of accident involving my bike, divide it by the number of bikes I expect to sell, and I find it's about $25 per bike; installing those two extra bolts creates $5 of marginal utility or 2.50 each so I go ahead and do it.

Should I not go ahead and add 1 more bolts? No, because it will cost an additional $10 for no noticeable increase in safety, so the marginal utility is -$10.

"Marginal utility is the degree to which adding one more of something will exceed the cost of doing so."

That's a meaningless statement, because you can't compare/subtract marginal utility and marginal cost. The latter is measured in some currency (e.g. USD) but the former is not.

You can compare the marginal utility of X with the marginal utility of the cost of X, but then what you're really doing is comparing the marginal utility of X with the marginal utility of Y, where Y is the highest-utility alternative use for the marginal cost of X.

Anyway, back to my actual point: the comment to which you responded was talking about marginal utility. I'll attempt to elaborate on the example (music vs. water). Water is more valuable than music. That sounds right intuitively, but what do we mean? What we mean is that if we had to give up 100% of something, we'd choose to give up 100% of music instead of 100% of water. But all that says is that there's some finite amount of water that has higher marginal utility than all the music in the world. And that's right. If I need a minimum of 300ml of water to live per day, then I'd give anything for that 300ml. Maybe I'd give a lot for the an extra 300ml per day also, but it's not as important. And by the time I'm drinking 5 litres per day, I'd probably rather spend money on CDs than buy more water, as the marginal utility is zero.

Marginal utility is from the perspective of a consumer not a producer, so cost doesn't come into it. The analogy that stuck with me was eating bars of chocolate from the initial one which tastes delicious, and thus has high MU, until the one where you puke, by which point the MU has become negative. Cost is pretty much constant throughout.

> to which adding one more of something will exceed the cost of doing so.

No. That's marginal cost.

I think you've got to expand on that. Just "No, it's [other thing]" kills the conversation.

Marginal utility is a consumption function. By itself, it says nothing about cost or what a producer will do,

> In economics, utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility of a good or service is the change in the utility from an increase in the consumption of that good or service.

https://en.wikipedia.org/wiki/Marginal_utility

By contrast, marginal cost is about change in a producer's cost function with changes in quantity,

> marginal cost is the change in the opportunity cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good.

https://en.wikipedia.org/wiki/Marginal_cost

The commenter starts out using the word "cost" along with the rest of his example which is elaborated upon to describe the MC=MR profit maximizing function.

Or, in continuous terms, marginal X is simply the first derivative of X with respect to some other variable.

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