Marginal Utilities: Definition, Types, Examples, and History

Marginal utility is the added satisfaction that a consumer gets from having one more unit of a good or service. The concept of marginal utility is used by ... Economics GuidetoMicroeconomics Investopedia/DennisMadamba WhatIsMarginalUtility? Marginalutilityistheaddedsatisfactionthataconsumergetsfromhavingonemoreunitofagoodorservice.Theconceptofmarginalutilityisusedbyeconomiststodeterminehowmuchofanitemconsumersarewillingtopurchase. Positivemarginalutilityoccurswhentheconsumptionofanadditionalitemincreasesthetotalutility.Ontheotherhand,negativemarginalutilityoccurswhentheconsumptionofonemoreunitdecreasestheoverallutility. KeyTakeaways Marginalutilityistheaddedsatisfactionaconsumergetsfromhavingonemoreunitofagoodorservice.Theconceptofmarginalutilityisusedbyeconomiststodeterminehowmuchofanitemconsumersarewillingtopurchase.Thelawofdiminishingmarginalutilityisoftenusedtojustifyprogressivetaxes.Marginalutilitycanbepositive,zero,ornegative. 1:19 MarginalUtility UnderstandingMarginalUtility Economistsusetheideaofmarginalutilitytogaugehowsatisfactionlevelsaffectconsumerdecisions.Economistshavealsoidentifiedaconceptknownasthelawofdiminishingmarginalutility.Itdescribeshowthefirstunitofconsumptionofagoodorservicecarriesmoreutilitythanlaterunits. Althoughmarginalutilitytendstodecreasewithconsumption,itmayormaynoteverreachzerodependingonthegoodconsumed. Marginalutilityisusefulinexplaininghowconsumersmakechoicestogetthemostbenefitfromtheirlimitedbudgets.Ingeneral,peoplewillcontinueconsumingmoreofagoodaslongasthemarginalutilityisgreaterthanthemarginalcost.Inanefficientmarket,thepriceequalsthemarginalcost.Thatiswhypeoplekeepbuyingmoreuntilthemarginalutilityofconsumptionfallstothepriceofthegood. Thelawofdiminishingmarginalutilityisoftenusedtojustifyprogressivetaxes.Theideaisthathighertaxescauselesslossofutilityforsomeonewithahigherincome.Inthiscase,everyonegetsdiminishingmarginalutilityfrommoney.Supposethatthegovernmentmustraise$20,000fromeachpersontopayforitsexpenses.Iftheaverageincomeis$60,000beforetaxes,thentheaveragepersonwouldmake$40,000aftertaxesandhaveareasonablestandardofliving. However,askingpeoplemakingonly$20,000togiveitalluptothegovernmentwouldbeunfairanddemandafargreatersacrifice.Thatiswhypolltaxes,whichrequireeveryonetopayanequalamount,tendtobeunpopular. Also,aflattaxwithoutindividualexemptionsthatrequiredeveryonetopaythesamepercentagewouldimpactthosewithlessincomemorebecauseofmarginalutility.Someonemaking$15,000peryearwouldbetaxedintopovertybya33%tax,whilesomeonemaking$60,000wouldstillhaveabout$40,000. TypesofMarginalUtility Therearemultiplekindsofmarginalutility.Threeofthemostcommononesareasfollows: PositiveMarginalUtility Positivemarginalutilityoccurswhenhavingmoreofanitembringsadditionalhappiness.Supposeyoulikeeatingasliceofcake,butasecondslicewouldbringyousomeextrajoy.Then,yourmarginalutilityfromconsumingcakeispositive. ZeroMarginalUtility Zeromarginalutilityiswhathappenswhenconsumingmoreofanitembringsnoextrameasureofsatisfaction.Forexample,youmightfeelfairlyfullaftertwoslicesofcakeandwouldn'treallyfeelanybetterafterhavingathirdslice.Inthiscase,yourmarginalutilityfromeatingcakeiszero. NegativeMarginalUtility Negativemarginalutilityiswhereyouhavetoomuchofanitem,soconsumingmoreisactuallyharmful.Forinstance,thefourthsliceofcakemightevenmakeyousickaftereatingthreepiecesofcake. HistoryofMarginalUtility Theconceptofmarginalutilitywasdevelopedbyeconomistswhowereattemptingtoexplaintheeconomicrealityofprice,whichtheybelievedwasdrivenbyaproduct'sutility.Inthe18thcentury,economistAdamSmithdiscussedwhatisknownas"theparadoxofwateranddiamonds."Thisparadoxstatesthatwaterhasfarlessvaluethandiamonds,eventhoughwaterisvitaltohumanlife. Thisdisparityintriguedeconomistsandphilosophersaroundtheworld.Inthe1870s,threeeconomists—WilliamStanleyJevons,CarlMenger,andLeonWalras—eachindependentlycametotheconclusionthatmarginalutilitywastheanswertothewateranddiamondsparadox.Inhisbook,TheTheoryofPoliticalEconomy,Jevonsexplainedthateconomicdecisionsaremadebasedon"final"(marginal)utilityratherthantotalutility. ExampleofMarginalUtility Davidhasfourgallonsofmilk,thendecidestopurchaseafifthgallon.Meanwhile,Kevinhassixgallonsofmilkandlikewisechoosestobuyanadditionalgallon.Davidbenefitsfromnothavingtogotothestoreagainforafewdays,sohismarginalutilityisstillpositive.Ontheotherhand,Kevinmayhavepurchasedmoremilkthanhecanreasonablyconsume,meaninghismarginalutilitymightbezero. Thechieftakeawayfromthisscenarioisthatthemarginalutilityofabuyerwhoacquiresmoreandmoreofaproductsteadilydeclines.Eventually,thereisnoadditionalconsumerneedfortheproductinmanycases.Atthatpoint,themarginalutilityofthenextunitequalszeroandconsumptionends. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. AdamSmith."TheWealthofNations,"Page30.ElectronicClassicsSeries,2005. W.StanleyJevons."TheTheoryofPoliticalEconomy."SentryPress,reprinted1965. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. 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Anindifferencecurveisagraphusedineconomicsthatrepresentswhentwogoodsorcommoditieswouldgiveaconsumerequalsatisfactionandutility. more PartnerLinks RelatedArticles Economics WhatDoestheLawofDiminishingMarginalUtilityExplain? Economics WhatIsUtilityFunctionandHowIsItCalculated? GuidetoMicroeconomics MarginalUtilityvs.MarginalBenefit:What’stheDifference? Economics MarginalUtilityvs.MarginalValue:What'stheDifference? GuidetoMicroeconomics MarginalBenefitvs.MarginalCost:What'stheDifference? Economics APracticalLookAtMicroeconomics