The practical side of Jesus’ ukase on wealth
Tejvan Pettinge writes in Economics Help:
Diminishing marginal utility of income and wealth suggests that as income increases, individuals gain a correspondingly smaller increase in satisfaction and happiness.
Utility means satisfaction, usefulness, happiness gained. Utility could be measured by the amount you are willing to spend on a good.
Marginal utility of first £100
If you have zero income, and gain £100 a week. This £100 will improve your living standards significantly. With this £100 you will be able to pay for basic necessity of life – food, drink, shelter and heating. Without this basic £100 a week, life would be tough.
Marginal utility of income increasing from £500 to £600 (6th £100)
However, if you already gain £500 a week, an extra £100 has a proportionately smaller increase in utility. You may be able to eat out at restaurants more often, but it doesn’t significantly affect your standard of living and happiness. At £500 a week, you can afford most things you need. But, still most people would be happy to gain an extra £100 to spend on luxuries like going out.
Marginal utility of income increasing from £10,000 to £10,100
If you are earning £10,000 a week – you would hardly notice an extra £100 a week. You may not even have time or ability to spend it; this extra income is liable to be just saved. Therefore, we say the marginal utility of an extra £100 at this income level is very limited.
Therefore as income increases, the extra marginal benefit to individuals declines.
Diminishing marginal utility of wealth
Income is the amount of money received per time period. Wealth is a stock concept (the amount of savings, property owned)
It is a very similar effect with wealth. If you have savings of £10,000 – this can be useful for giving you insurance in periods of unemployment or the need to buy large items, like a new cooker. If you own one car, it can be useful for getting to work. Also, owning a house is a form of wealth and it is important for giving you a place to live.
However, suppose your wealth increases. If you now own two cars, the extra benefit is much diminished compared to the first car. It might be useful to have two cars in case one breaks down, but you can only drive one at a time. If you have 7 or 8 cars like a collector, you may get some joy from having a collection, but the extra utility of that 8th car is significantly lower than the working person who has just one car to get to work.
Some economists argue that wealthy people can use their wealth primarily to gain feelings of prestige and show their position in society. For example, the utility of a £100,000 car is not because you get anywhere quicker, but because it becomes a status symbol – a symbol to show other people your success. Therefore, the utility to society is very minimal. . ..