Chapter 4

Marginal Utility
Loading the player...

What is 'Marginal Utility'

Marginal utility is the additional satisfaction a consumer gains from consuming
one more unit of a good or service. Marginal utility is an important economic
concept because economists use it to determine how much of an item a
consumer will buy. Positive marginal utility is when the consumption of an
additional item increases the total utility. Negative marginal utility is when the
consumption of an additional item decreases the total utility.

Utility is the satisfaction that a person derives from the

consumption of a good or service. Total utility is the
total satisfaction received from consuming a given total
quantity of a good or service, while marginal utility is
the satisfaction gained from consuming an additional
quantity of a particular good or service. Sometimes,
economists like to subdivide utility into individual units
that they call utils. However, because utility is
subjective, meaning that it differs from person to
person, and because it varies continuously, depending
on the quantity consumed, an util cannot actually be
measured, but is simply a heuristic device that allows
economists to talk about the degree of satisfaction of a
product or service.

Although one definition of utility is usefulness,

usefulness is not a quality in economic utility. For
instance, water is very useful, but doesn't have much
utility for most people. On the other hand, judging by
recent gold prices in the market, gold has great utility
for some people, but it is not very useful.

One quality of marginal utility is that it always declines for each successive quantity
consumed of a particular good. If you like ice cream, and you eat one scoop,
the first scoop will provide the greatest satisfaction. If you eat another scoop,
you'll probably enjoy that also, but the satisfaction will be less than for the
first. At some point, you will not want any more ice cream. The marginal utility
will drop to zero and will even become negative. This is an everyday illustration
of the law of diminishing marginal utility. Marginal utility declines for
everything, including money. Although many people want to amass great
wealth, each dollar that is accumulated becomes worth less and less, because
the marginal utility of what it can buy declines.