Households — common mistakes

When drawing diagrams, remember that the MU curve is the gradient of the TU curve. The TU curve is at its maximum when the MU curve cuts the x-axis (MU=0). Be prepared to calculate MU from a table of TU data.

For diamond-water paradox questions: price reflects marginal utility (utility of the next unit), not total utility. Water is cheap because its MU is low when abundant; diamonds are expensive because extra units are scarce and highly valued.

Yes. While total utility is almost always positive, marginal utility can become negative. This occurs when consuming an additional unit of a good actually reduces your total satisfaction. For example, eating a sixth slice of cake might make you feel unwell, thus providing negative marginal utility and decreasing your total utility from the consumption of cake.

Not necessarily. 'Utility' in economics refers to subjective satisfaction. A good can provide high utility without being 'useful' in a practical sense (e.g., a piece of art). Conversely, a very useful good (like tap water) might have a low marginal utility if you have already consumed a lot of it. The key is the level of satisfaction it provides to the individual consumer at a particular moment.

While we cannot assign a precise numerical value to satisfaction (a cardinal measure), the concept of utility is a powerful theoretical tool for modelling consumer behaviour. The ordinal ranking of preferences (preferring good A to good B) and the principle of diminishing marginal utility are sufficient to explain fundamental economic laws, such as why demand curves slope downwards, without needing to know the exact 'utils' involved.