Marginal utility is the added satisfaction a consumer derives from acquiring one additional unit of a good or service. Economists leverage this concept to gauge the extent to which consumers are willing to purchase additional items.
Positive marginal utility arises when an extra unit consumed increases total satisfaction, while negative marginal utility emerges when an additional unit decreases overall happiness.
Key Takeaways
- Marginal utility reflects the added satisfaction a consumer gets from one more unit of a good or service.
- It helps economists determine consumer buying patterns and preferences.
- The law of diminishing marginal utility often supports the rationale for progressive taxation.
- Marginal utility can be positive, zero, or negative.
Understanding Marginal Utility
Economists utilize the concept of marginal utility to understand how satisfaction levels influence consumer decisions. The law of diminishing marginal utility states that the satisfaction derived from consuming additional units of a good or service typically decreases.
Consumers tend to continue purchasing more of a good as long as its marginal utility exceeds its marginal cost. Markets reach an efficient point when the price equals the marginal cost, leading consumers to buy more until the marginal utility equals the price of the good.
Types of Marginal Utility
There are different types of marginal utility, which include:
Positive Marginal Utility
Positive marginal utility occurs when each additional unit consumed increases overall happiness. For instance, enjoying a piece of cake and finding joy in having another piece represents positive marginal utility.
Zero Marginal Utility
Zero marginal utility happens when consuming additional units does not lead to further satisfaction. If you feel no extra satisfaction after consuming a third slice of cake, your marginal utility from additional cake is zero.
Negative Marginal Utility
Negative marginal utility is when consuming more units leads to a decrease in overall satisfaction. Eating a fourth slice of cake could make you feel sick, illustrating negative marginal utility.
History of Marginal Utility
The concept of marginal utility was explored to explain price determination through utility. Adam Smith discussed the paradox that water, vital for life, is less valued than diamonds. In the 1870s, economists like William Stanley Jevons, Carl Menger, and Leon Walras identified marginal utility as a solution to this paradox. Jevons explained economic decisions are based on marginal utility instead of total utility in The Theory of Political Economy.
Example of Marginal Utility
Imagine David has four gallons of milk and buys a fifth. His marginal utility remains positive as he avoids additional trips to the store. However, Kevin with six gallons who buys another may find no added benefit, showing zero marginal utility.
The scenario shows how marginal utility declines with increasing quantities, leading to a point where marginal utility equals zero, stopping further consumption.
Marginal Utility vs. Total Utility
Marginal utility measures the added satisfaction from one extra unit, whereas total utility is the overall satisfaction from all consumed units. Positive marginal utility increases total utility; negative marginal utility decreases it. For example, the first personal trainer session often provides high satisfaction, which diminishes with each additional session.
How to Calculate Marginal Utility
Calculate marginal utility by dividing the change in total utility (TU) by the change in the number of units (Q):
ΔTU = TU2 - TU1 ΔQ = Q2 - Q1
Applications of Marginal Utility
Consumers
Consumers prefer products with higher marginal utility, leading to repeated purchases and brand loyalty over time.
Businesses
Products offering sustained satisfaction are priced higher, and marginal utility guides businesses in product innovation and upgrades.
Governments
The law of diminishing marginal utility justifies progressive taxes. Higher incomes face less sacrifice from higher taxes due to the diminishing marginal utility of money.
Frequently Asked Questions
What Is the Formula for Marginal Utility?
The formula for marginal utility is change in total utility (ΔTU) divided by change in the number of units (ΔQ): MU = ΔTU/ΔQ.
What Is the Law of Diminishing Marginal Utility?
This law states as consumption increases, satisfaction derived from each additional unit decreases, explaining consumers’ decreasing willingness to pay for additional units.
What Is Marginal Cost?
Marginal cost is the additional cost incurred in producing one extra unit. It helps businesses achieve economies of scale by allowing profit-making if the price per unit exceeds marginal cost.
The Bottom Line
Marginal utility pertains to the adding satisfaction from one additional unit of a good or service. It can vary positively, negatively, or reach zero. When it equals zero or turns negative, consumption ceases, shaping business pricing strategies, consumer purchases, and justifying progressive taxation based on the decreasing value of each additional income unit.
Related Terms: utility, marginal cost, total utility, progressive tax, diminishing marginal utility.
References
- Internet Archive. “Adam Smith Wealth of Nations”, Page 30.
- William Stanley Jevons. The Theory of Political Economy. Sentry Press, Reprinted 1965.
- Corporate Finance Institute. “What Is the Law of Diminishing Marginal Utility?”
