Thread: Marginal Utility

Originally Posted by goober

Yeah OK, so maybe you should read up on what "marginal utility" means before you dig that hole too deep.

I have read and do understand marginal utility. It appears you don't want to understand how adding dollars to an already rich persons income may or may not increase or decrease marginal utility. Your grasp of the situation fails you in many cases where adding income improves marginal utility.

Maybe you can tell me what the actual effect on that hedge fund manager would have been if he had taken home 1.75 billion dollars less....
What would he have to do without.....

Ok, one more time for the Gipper. If that hedge fund manager/partner takes home 3 billion dollars and invests every penny beyond what he spends for necessities IAW his basic life style, all of that extra money is an increase in marginal utility. If that hedge fund manager/partner paid all of the money for necessities IAQ his basic life style then puts the rest of the money in a lock box earning less than had he invested it, he would suffer a loss of marginal utility. It is really very simple. Why are you trying to make it out to be difficult?

http://en.wikipedia.org/wiki/Margina...rginal_utility

The marginal utility of money is constant.

In economics, the marginal utility of a good or service is the gain (or loss) from an increase (or decrease) in the consumption of that good or service. Economists sometimes speak of a law of diminishing marginal utility, meaning that the first unit of consumption of a good or service yields more utility than the second and subsequent units.[citation needed]

The concept of marginal utility played a crucial role in the marginal revolution of the late 19th century, and led to the replacement of the labor theory of value by neoclassical value theory in which the relative prices of goods and services are simultaneously determined by marginal rates of substitution in consumption and marginal rates of transformation in production, which are equal in economic equilibrium.

The term marginal refers to a small change, starting from some baseline level. As Philip Wicksteed explained the term,

"Marginal considerations are considerations which concern a slight increase or diminution of the stock of anything which we possess or are considering"[1]

Frequently the marginal change is assumed to start from the endowment, meaning the total resources available for consumption (see Budget constraint). This endowment is determined by many things including physical laws (which constrain how forms of energy and matter may be transformed), accidents of nature (which determine the presence of natural resources), and the outcomes of past decisions made both by others and by the individual himself or herself.

For reasons of tractability, it is often assumed in neoclassical analysis that goods and services are continuously divisible. Under this assumption, marginal concepts, including marginal utility may be expressed in terms of differential calculus. Marginal utility can be defined as a measure of relative satisfaction gained or lost from an increase or decrease in the consumption of that good or service.

Thus it is understood that so long as the individual concerned actually increases the utility with a marginal increase such as making a monitary investment such that more money of equal purchasing power is gained, the marginal utility of money does not go down.

If you want to translate that to a good or service, letting N represent that good or service. If one acquires N x Y to the point that that the Y factor (Money) sits in the closet (the lock box)and is not used, that would indicate a marginal loss of utility.

Originally Posted by dnsmith

I have read and do understand marginal utility. It appears you don't want to understand how adding dollars to an already rich persons income may or may not increase or decrease marginal utility. Your grasp of the situation fails you in many cases where adding income improves marginal utility.Ok, one more time for the Gipper. If that hedge fund manager/partner takes home 3 billion dollars and invests every penny beyond what he spends for necessities IAW his basic life style, all of that extra money is an increase in marginal utility. If that hedge fund manager/partner paid all of the money for necessities IAQ his basic life style then puts the rest of the money in a lock box earning less than had he invested it, he would suffer a loss of marginal utility. It is really very simple. Why are you trying to make it out to be difficult?

Marginal utility - Wikipedia, the free encyclopedia

The marginal utility of money is constant.

In economics, the marginal utility of a good or service is the gain (or loss) from an increase (or decrease) in the consumption of that good or service. Economists sometimes speak of a law of diminishing marginal utility, meaning that the first unit of consumption of a good or service yields more utility than the second and subsequent units.[citation needed]

The concept of marginal utility played a crucial role in the marginal revolution of the late 19th century, and led to the replacement of the labor theory of value by neoclassical value theory in which the relative prices of goods and services are simultaneously determined by marginal rates of substitution in consumption and marginal rates of transformation in production, which are equal in economic equilibrium.

The term marginal refers to a small change, starting from some baseline level. As Philip Wicksteed explained the term,

"Marginal considerations are considerations which concern a slight increase or diminution of the stock of anything which we possess or are considering"[1]

Frequently the marginal change is assumed to start from the endowment, meaning the total resources available for consumption (see Budget constraint). This endowment is determined by many things including physical laws (which constrain how forms of energy and matter may be transformed), accidents of nature (which determine the presence of natural resources), and the outcomes of past decisions made both by others and by the individual himself or herself.

For reasons of tractability, it is often assumed in neoclassical analysis that goods and services are continuously divisible. Under this assumption, marginal concepts, including marginal utility may be expressed in terms of differential calculus. Marginal utility can be defined as a measure of relative satisfaction gained or lost from an increase or decrease in the consumption of that good or service.

Thus it is understood that so long as the individual concerned actually increases the utility with a marginal increase such as making a monitary investment such that more money of equal purchasing power is gained, the marginal utility of money does not go down.

If you want to translate that to a good or service, letting N represent that good or service. If one acquires N x Y to the point that that the Y factor (Money) sits in the closet (the lock box)and is not used, that would indicate a marginal loss of utility.

Again you miss the point.

If you have $10,000 saved for your retirement.
And to this you add another $10,000, that is very useful in helping you build your retirement funds.

If you have $10,000,000 saved for retirement, adding $10,000 will make very little difference to your retirement plans.

The more you have invested, the less utility a further investment will produce.

Money is a good purchased with other goods and services.

At one time I was willing to work for $10/hour, now I have enough money so that the value of another $10 is not worth an hour of my time.
The marginal utility of a dollar has declined for me.

Originally Posted by dnsmith

Definition of 'Carried Interest'
A share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund's performance.[(me)Motivation for earning even more money for the investors..]

Investopedia explains 'Carried Interest'
Traditionally, the amount of carried interest comes out to around 20-25% of the fund's annual profit. While all funds tend to have a small management fee, the management fee is meant to only cover the costs of managing the fund, with the exception of compensating the fund manager.

Carried interest is meant to serve as the primary source of income for the general partner. However, the general partner must ensure that all the initial capital that the limited partners contribute is returned along with some previously agreed upon rate of return.

In essence: Either a commission or profit-sharing, whatever you think is the better analogy ... except that its taxed at capital gains rates instead of regular income rates like commission or profit sharing.

Originally Posted by goober

Again you miss the point.

If you have $10,000 saved for your retirement.
And to this you add another $10,000, that is very useful in helping you build your retirement funds.

If you have $10,000,000 saved for retirement, adding $10,000 will make very little difference to your retirement plans.

The more you have invested, the less utility a further investment will produce.

Money is a good purchased with other goods and services.

At one time I was willing to work for $10/hour, now I have enough money so that the value of another $10 is not worth an hour of my time.
The marginal utility of a dollar has declined for me.

And that is all anecdotal. I lived out of my truck for 6 months on the street. Every penny is valuable to me. I pick them up off the street even though I have had a successful business for over 10 years and still going. I make enough to pay several employees over 50K a year in commission. But it is not enough, I make more money and I buy better stuff.

Originally Posted by Wlessard

And that is all anecdotal. I lived out of my truck for 6 months on the street. Every penny is valuable to me. I pick them up off the street even though I have had a successful business for over 10 years and still going. I make enough to pay several employees over 50K a year in commission. But it is not enough, I make more money and I buy better stuff.

A perfect example of the Marginal Utility of money...

And actually that wasn't anecdotal, it was theoretical.
It's a thought experiment.

If you are investing for example, do you pick your absolute favorite stock and put all your money into it?
Or while it may be your largest holding, you diversify into a variety of investments, as the marginal utility of your current favorite falls off as your commitment to it grows, at some point the utility of another investment exceeds it, and you shift your marginal investment to that vehicle.

Originally Posted by goober

A perfect example of the Marginal Utility of money...

Not at all.

And actually that wasn't anecdotal, it was theoretical.
It's a thought experiment.

If you are investing for example, do you pick your absolute favorite stock and put all your money into it?

No, but not because it isn't a great stock but because putting all your eggs into one basket is not a financially safe way to invest.

Or while it may be your largest holding, you diversify into a variety of investments, as the marginal utility of your current favorite falls off as your commitment to it grows, at some point the utility of another investment exceeds it, and you shift your marginal investment to that vehicle.

Your entire explanation relative to investments, favorites or other wise is not a correct explanation of marginal utility. It only suggests that spreading around your investment money is a safer way to invest. It has NOTHING to do with marginal utility the way you described it.

It seems we are in discussions here with serveral different definitions of "utility."

Originally Posted by Sluggo

It seems we are in discussions here with serveral different definitions of "utility."

By golly I think you've got it.

Originally Posted by dnsmith

By golly I think you've got it.

I'm using the definition used by economists, what Keynes called "The marginal propensity to spend"

Originally Posted by Sluggo

Even more evidence that you would ignore government's marginal utility with all of the "investments" they tend make. But more to the point, also to cover up that Marginal Utility of Money should only be used as a weapon to remove wealth from the individual for transfer to a government aristocracy.

Originally Posted by goober

I'm using the definition used by economists, what Keynes called "The marginal propensity to spend"

I have a suggestion...
Try discussing the benefits of having an endless employee pool and why the "free market" won't "work it out".

Originally Posted by goober

I'm using the definition used by economists, what Keynes called "The marginal propensity to spend"

You may be using the definition of the term as stated by Keynes, but you are not describing the situation which Keynes describes as being marginal utility of money. "The marginal propensity to spend" is not the same as the marginal utility. Try to understand the following:

In economics, the marginal propensity to consume (MPC) is an empirical metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers). The proportion of the disposable income which individuals desire to spend on consumption is known as propensity to consume. Marginal propensity to consume (mpc) is the proportion of additional income that an individual desires to consume. For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents.

The marginal propensity to save (MPS) refers to the increase in saving (non-purchase of current goods and services) that results from an increase in income i.e. The marginal propensity to save might be defined as the proportion of each additional dollar of household income that is used for saving. It is also used as an alternative term for the slope of the saving line.[1] For example, if a household earns one extra dollar, and the marginal propensity to save is 0.35, then of that dollar, the household will spend 65 cents and save 35 cents. It can also go the other way, referring to the decrease in saving that results from a decrease in income. A good example of this occurred during the last 3 years of my working life when I chose to specify exactly how many dollars I wanted to receive to support my wife and I. I then elected the balance of my wages which continued to increase until the day I retired. IE my marginal propensity to save in that case was 100%. My goal was to set an amount on which we could live comfortably and continued to work until my retirement pay was equal to or greater than what we lived on for those 3 years. It also gave us a nice nest egg.

By transposing the word spend for save, in the case exampled above my marginal propensity to spend was 0%

Definition of 'Marginal Propensity To Consume - MPC'A component of Keynesian theory, MPC represents the proportion of an aggregate raise in pay that is spent on the consumption of goods and services, as opposed to being saved.

In economics, the marginal utility of a good or service (money) is the gain (or loss) from an increase (or decrease) in the consumption of that good or service. Economists sometimes speak of a law of diminishing marginal utility, meaning that the first unit of consumption of a good or service yields more utility than the second and subsequent units.

Not only is it important to know the words of a theory, it is important to realize it is different for every person and every application. One could look at a specific situation and determine if the individual is getting as much utility from his last dollar as his first and determine if that utility goes up or down. Remember too, when "marginal" is used in the construct it is describing what will happen with a very small change in quantity of thing or money.

Originally Posted by goober

A perfect example of the Marginal Utility of money...

And actually that wasn't anecdotal, it was theoretical.
It's a thought experiment.

If you are investing for example, do you pick your absolute favorite stock and put all your money into it?
Or while it may be your largest holding, you diversify into a variety of investments, as the marginal utility of your current favorite falls off as your commitment to it grows, at some point the utility of another investment exceeds it, and you shift your marginal investment to that vehicle.

I buy 2 things, Gold and Silver.

I did buy Ford years ago at $1.23 and sold when they hit $25.

But there is no marginal utility to my money needs. Every last penny matters, I save against the worst case of the business going under. That and I am a Frugal Scotsman too. My point is that marginal utility of money fails as a constant. Every individual is different and has different needs and wants.

Originally Posted by dnsmith

You may be using the definition of the term as stated by Keynes, but you are not describing the situation which Keynes describes as being marginal utility of money. "The marginal propensity to spend" is not the same as the marginal utility. Try to understand the following:

In economics, the marginal propensity to consume (MPC) is an empirical metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers). The proportion of the disposable income which individuals desire to spend on consumption is known as propensity to consume. Marginal propensity to consume (mpc) is the proportion of additional income that an individual desires to consume. For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents.

The marginal propensity to save (MPS) refers to the increase in saving (non-purchase of current goods and services) that results from an increase in income i.e. The marginal propensity to save might be defined as the proportion of each additional dollar of household income that is used for saving. It is also used as an alternative term for the slope of the saving line.[1] For example, if a household earns one extra dollar, and the marginal propensity to save is 0.35, then of that dollar, the household will spend 65 cents and save 35 cents. It can also go the other way, referring to the decrease in saving that results from a decrease in income. A good example of this occurred during the last 3 years of my working life when I chose to specify exactly how many dollars I wanted to receive to support my wife and I. I then elected the balance of my wages which continued to increase until the day I retired. IE my marginal propensity to save in that case was 100%. My goal was to set an amount on which we could live comfortably and continued to work until my retirement pay was equal to or greater than what we lived on for those 3 years. It also gave us a nice nest egg.

By transposing the word spend for save, in the case exampled above my marginal propensity to spend was 0%

Definition of 'Marginal Propensity To Consume - MPC'A component of Keynesian theory, MPC represents the proportion of an aggregate raise in pay that is spent on the consumption of goods and services, as opposed to being saved.

In economics, the marginal utility of a good or service (money) is the gain (or loss) from an increase (or decrease) in the consumption of that good or service. Economists sometimes speak of a law of diminishing marginal utility, meaning that the first unit of consumption of a good or service yields more utility than the second and subsequent units.

Not only is it important to know the words of a theory, it is important to realize it is different for every person and every application. One could look at a specific situation and determine if the individual is getting as much utility from his last dollar as his first and determine if that utility goes up or down. Remember too, when "marginal" is used in the construct it is describing what will happen with a very small change in quantity of thing or money.

Exactly, good examples of the marginal utility of money