Marginal Utility - Explained
What is Marginal Utility?
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What is Marginal Utility?
Marginal utility is an economic term which refers to extra satisfaction gained by a consumer for consuming an additional unit of either a commodity or service. This means that there is always a satisfaction that one gets when he or she uses an item more than once. This additional satisfaction is what is referred to as marginal utility in economics. In economics, marginal utility is a means through which a consumer satisfaction for consuming an additional unit of commodity or service is measured.
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How is Marginal Utility Used?
Generally, the utility is a concept that tries to explain how consumers achieve a certain level of satisfaction when they consume goods or services. On the other hand, marginal utility is that benefit consumers get when they consume an additional unit of either a commodity or service. Economists use this marginal utility concept to find out the number of commodities or services a consumer will purchase. In other words, they use marginal utility to gauge how the levels of satisfaction are influencing consumers decisions. This means that it is through a marginal utility that economists are able to understand the consumers behavior towards a certain commodity or service. They achieve this by simply observing how much people spend on goods and services in order to reach their maximum satisfaction.
The Origin of Marginal Utility
The concept of marginal utility was created by economists in the 19th century while they were trying to explain the prices economic reality, which they saw as being driven by the utility of the product. This then led to the conundrum called, the paradox of water and diamonds, which according to Adam Smith, it meant The Wealth of the Nations. This paradox, therefore, states that there is less value in water than it is with diamonds, despite the water being crucial to human existence. Note that both marginal utility and marginal cost are applied when determining the cost. This then makes it a paradox because, in reality, the cost of water is less compared to that of diamonds if you choose to scale them in terms of their cost value, rather than their value to human life.
Types of Marginal Utility
Note that there are various types of marginal utility and they include diminishing, increasing, negative, positive, and zero marginal utility.
Diminishing Marginal Utility
This type of utility can also be referred to as, the law of diminishing marginal utility. It is a concept that economists use to try and explain how the first consumption of a commodity or service unit, influences the subsequent unit consumption. It is important to note that utility is never constant and that is why people will always experience diminishing marginal utility. For instance, when you consume one glass of water, it will greatly quench (satisfy) your thirst. However, if you take another glass of water, the satisfaction you get from drinking the second glass of water will not be great compared to the satisfaction you got from the first glass of water. Generally, when it comes to marginal utility, it is believed that the consumption of an additional unit of a commodity, will always decline the more it is consumed. This means that the satisfaction of the first consumption will always be greater than the subsequent consumptions. In other words, the more you consume a commodity, the less the urge of consuming more of that commodity.
Increasing Marginal Utility
This type of utility is simply the opposite of diminishing utility in the sense that, the urge of satisfaction becomes greater when there is an increase in commodity use. For instance, when fixing your cars tires, there is little value in the first three tires because a car cannot move with three tires. However, there is a greater value placed on the third tire because it is the fourth tire that will enable your car to move. Therefore, purchasing and fixing the three tires is equally important but there is more satisfying when you finally purchase and fix the fourth tire.
Positive Marginal Utility
Positive marginal utility is a type of utility where the consumption of an extra commodity causes the total utility to rise. For instance, lets assume that in a barbershop, one haircut will cost you $50. Nonetheless, there is an offer whereby when you pay 6 haircuts in advance, which totals to $300, then the 7th haircut will be offered to you free of charge. Therefore, if you agree to this kind of offer, there will be definitely satisfaction when you pay 6 haircuts in advance since, at the end of it all, the total cost of the entire haircuts will be relatively low.
Negative Marginal Utility
Negative marginal utility is the opposite of positive marginal utility. This is because, unlike positive marginal utility, where the consumption of an extra commodity increases the total utility, negative marginal utility decreases the total utility. In other words, this type to marginal utility, the consumption of an extra commodity causes the total utility to decrease. For instance, when the right dose of antibiotics is taken, it is capable of killing bacterial infections in a patient. However, when it is taken in high doses (more than the prescribed dose) it does not lead to a quick recovery. This, therefore, means that more dosage of antibiotic decreases its effectiveness of treating bacterial infection in a patient.
Zero Marginal Utility
In this type of utility, there is always no satisfaction one gains for getting an extra commodity hence the term, zero marginal utility. For instance, lets assume that you want to purchase tickets for five people to a music concert. Then, there happen to be an offer whereby when you purchase five tickets, you get one free. In this scenario, there will be zero satisfaction in the sixth ticket since you only need five tickets. However, if you had a friend or relative whom you really wanted him or her to accompany you to the concert, only then can the sixth ticket be useful.
Assumptions of Marginal Utility Analysis
The following assumptions apply when analyzing marginal utility:
The Cardinal Measurability of Utility
This theory is of the assumption that utility can be quantified and at the same time can be measured. For instance, you can derive 10 units utility when you consume 1 unit of X and 5 units when you consume 1 unit of commodity Z. This way, you can be able to make a comparison and also analyze different commodities so that you can be able to tell which among the available commodities gives greater satisfaction. Also, according to this theory, money is the means through which the utilitys rod is measured. Therefore, the sum of money you decide to spend to purchase a unit of a commodity instead of avoiding it becomes the utility that you gain from that particular commodity.
The Constancy of the Marginal Utility Money
This assumption states that whenever you spend cash on a certain commodity, the moneys marginal utility be constant all through. This then makes it easy to measure the commodities utility in terms of money.
The Hypothesis of Independent Utility
An important part of this theory is that it does not consider the complementarity between commodities. It instead states that the total utility derived from various commodities is sum total of each commoditys separate utilities.
Relationship between Total and Marginal Utility
Generally, total utility refers to the sum of utility derived from various commodities units that a customer consumes. On the other hand, marginal utility refers to the change derived when you consume an additional unit. These two concepts are co-related in the following ways:
- There is diminishing of marginal utility when the total utility increases.
- The marginal utility becomes zero when the total utility reaches a maximum.
- Lastly, the marginal utility gets to negative when the total utility begins to diminish.
Importance of Marginal Utility
In economics, this law helps one to understand how consumers are able to reach an equilibrium where a single commodity applies. In most cases, a consumer can make use of a commodity until the marginal utility equals the market price, which ensures the consumers maximum satisfaction.
- Total utility
- Marginal Utility
- Diminishing Marginal Utility
- Marginal Utility per Dollar
- Rule of Maximizing Utility
- Consumer Goods
- Changes in Income Affect Consumer Choices
- Changes in Price Affect Consumer Choices
- Substitution Effect
- Income Effect
- Budget Constraints Create Demand Curves
- Lifecycle Model of Consumption
- Autonomous Consumption
- Permanent Income Hypothesis
- Lipstick Effect
- Engel's Law
- Paradox of Thrift
- Ricardo Barro Effect
- Consumer Confidence Index
- The Wealth Effect
- Behavioral Economics