Marginal Utility Theory, Product Differentiation, and Revenue/Profit Maximization

Topics: Economics, Utility, Marginal concepts Pages: 5 (1699 words) Published: January 14, 2006
“Apply the concepts of marginal utility theory, product differentiation, and revenue/profit maximization to some event in your personal, daily lives.” [1]

Marginal Utility Concept Application

From the three concepts at hand this is by far the easiest to exemplify. According to Sloman and Sutcliffe the concept of utility is directly related to that of satisfaction [2]. The satisfaction that one individual takes from consuming something is called utility.

Now when we consider the utility concept we must differentiate first between total utility and marginal utility.

Total utility is the total satisfaction that one individual gets from consuming all the units of one same thing during a specific timeframe. ie. We can analyze the utility of consumption of coke during one day to analyze the “optimum” number of cokes to be consumed or we could analyze the utility of each sip we take from a can of coke to analyze the best size of can to offer in the market for example. No matter which, to the analysis of this as a whole, the total utility of the consumption of coke would be in one scenario the added utilities of all the cans of coke drank during the say in the first example, or the total utility of drinking one can of coke in the second example.

Marginal utility on the other hand is the utility that one individual gets from consuming one extra unit of one same thing during a specific timeframe. ie. We can look at the marginal utility of drinking one more can of coke on the same day, or from taking another sip from the coke bottle. In the marginal utility concept we can say that it focus on the satisfaction that individual units of one same thing give to the person consuming it.

Having said this I am going to give as a personal example something that happened to me a while back (not a pretty story). I was addicted to the Pokemon game a few years back when it was launched on the GameBoy console.

Initially I spent as much as 5 to 6 hours straight on the game as my Pokemons grew stronger and I went on my missions. Every pokemon caught and trained gave me a very high marginal utility that ensured I kept playing, until I had to close the game either due to having to sleep, eat or batteries running flat. As the game progressed I got less and less satisfaction from playing the game and catching pokemons. The marginal utility for every pokemon caught decreased considerably to the point where it just wasn’t fun anymore to catch pokemons and my marginal utility for playing the game became negative (I created an aversion to the game) and I stopped playing.

Product Differentiation Concept Application

Product differentiation as the name implies relates to how different products that target a specific audience differentiate from each other and achieve consumer spending preference. The concept of product differentiation can be seen from many perspectives, but in this case we’ll be talking from the viewpoint where there is a non-price competition [3] ie. the consumer will be looking at features of the product itself apart from the price to decide where he’ll spend his money.

In this case there are many factors that can drive the consumer to choose product A in favor of product B. Sloman and Sutcliffe consider that one of the ways to achieve this is by differentiating a product using one or more of the following areas: technical standards, quality standards, design characteristics and service characteristcs [4].

With these areas in mind, the products can be differentiated vertically and horizontally. Vertical differentiation is when a product has a perceived or de facto higher or lower quality than another. This is generally related to things like durability, quality of materials and technical characteristics.

Horizontal differentiation is when products that are considered to be in the same quality range appeal to different consumers for a matter of taste or preference for reasons like design, maybe it’s a newer...

References: [1] BE Syllabus, Discussion Questions, page 20, paragraph 1
[2] Sloman J. and Sutcliffe M., Economics for Business, page 109, paragraph 5
[3] Sloman J. and Sutcliffe M., Economics for Business, page 144, paragraph 2
[4] Sloman J. and Sutcliffe M., Economics for Business, page 144, paragraph 5 and after
[5] Sloman J. and Sutcliffe M., Economics for Business, page 201, paragraph 3
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