Marginal utility

In economics, the marginal utility of a good or service is the utility gained (or lost) from an increase (or
decrease) in the amount available of that good or service. Marginal utility is the utility associated with
the marginal use—the specific use to which an agent would put a given increase in that good or service,
or of the specific use that would be abandoned in response to a given decrease—which, if the economic
actor is economically rational, would (in the case of an increase) be the most urgent use of the good or
service for which it could be used (or, in the case of a decrease, the least urgent for which it is currently
used). Under the mainstream assumptions, the marginal utility of a good or service is the posited
quantified change in utility obtained by increasing or decreasing use of that good or service.

Marginality

Constraints are conceptualized as a border or margin. The location of the margin for any individual
corresponds to his or her endowment, broadly conceived to include opportunities. 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.

A value that holds true given particular constraints is a marginal value. A change that would be effected
as or by a specific loosening or tightening of those constraints is a marginal change, as large as the
smallest relevant division of that good or service. For reasons of tractability, it is often assumed in
neoclassical analysis that goods and services are continuously divisible. In such context, a marginal
change may be an infinitesimal change or a limit. However, strictly speaking, the smallest relevant
division may be quite large. Frequently, economic analysis concerns the marginal values associated with
a change of one unit of a resources, because decisions are often made in terms of units; marginalism
seeks to explain unit prices in terms of such marginal values.

Diminishing marginal utility

An individual will typically be able to partially order the potential uses of a good or service. For example,
a ration of water might be used to sustain oneself, a dog, or a rose bush. Say that a given person gives
her own sustenance highest priority, that of the dog next highest priority, and lowest priority to saving
the roses. In that case, if the individual has two rations of water, then the marginal utility of either of
those rations is that of sustaining the dog. The marginal utility of a third unit would be that of watering
the roses.

(The diminishing of marginal utility should not necessarily be taken to be itself an arithmetic subtraction.
It may be no more than a purely ordinal change.)

The notion that marginal utilities are diminishing across the ranges relevant to decision-making is called
“the law of diminishing marginal utility” (and also known as a “Gossen's First Law”). However, it will not
always hold. The case of the person, dog, and roses is one in which potential uses operate
independently—there is no complementarity across the three uses. Sometimes an amount added brings
things past a desired tipping point, or an amount subtracted causes them to fall short. In such cases, the
marginal utility of a good or service might actually be increasing. For example:
 bed sheets, which up to some number may only provide warmth, but after that point may allow
one to effect an escape by being tied together into a rope;
tickets, for travel or theatre, where a second ticket might allow one to take a date on an
otherwise uninteresting outing;
dosages of antibiotics, where having too few pills would leave bacteria with greater resistance,
but a full supply could effect a cure.

The fact that a tipping point may be reached does not imply that marginal utility will continue to
increase indefinitely thereafter. For example, beyond some point, further doses of antibiotics would kill
no pathogens at all.