MARGINAL UTILITY: INCREASING AND DECREASING, EXAMPLE - ECONOMY - 2025

The marginal utility is the additional satisfaction you get a buyer to a unit consuming more than one product or service. Marginal utility is an important economic concept because economists use it to determine how much of an item a consumer will buy.

The idea of ​​marginal utility was the result of the nineteenth century economists, who tried to explain the economic reality of price; they believed it was driven only by the utility of a product. This led to a paradox commonly known as that of water and diamonds, attributed to Adam Smith, author of The Wealth of Nations.

The paradox states that water has a much lower value than diamonds, even though water is vital to human life and diamonds are not. The price is determined by marginal utility and marginal cost, the key to the paradox being that the marginal cost of water is much less than that of diamonds.

What does it consist of?

In economics, utility is the satisfaction or benefit derived from consuming a product; therefore, the marginal utility of a product or service is the change in utility due to an increase in the consumption of that product or service.

Positive marginal utility is when, by consuming an additional item, the total utility increases. Negative marginal utility is when, by consuming an additional item, the total utility is reduced.

The concept of marginal utility implies that the utility or benefit to a consumer of an additional unit of a product is inversely related to the number of units he already owns of that product. There are two important questions that economists attempt to answer:

-How many units should we consume of a certain product or service to maximize our utility?

-How can we translate that information into a relevant understanding regarding the purchasing decision-making process that a person has?

Ice cream case

As a rule, marginal utility shows a negative change for each additional unit consumed. For example, the more ice cream you eat, the less satisfaction you will get over time.

If you keep eating them, the result will be nothing more than feeling sick to your stomach; This will prevent you from obtaining greater satisfaction. In this case, the marginal utility reaches negative values ​​and the total utility begins to decrease.

In the example above, the consumer gets a higher degree of satisfaction from each additional unit of ice cream consumed until Qty = 3 (line of increasing slope).

From that moment on, each additional unit produces a lower degree of satisfaction (line with decreasing slope). After Qty = 6, consumer satisfaction worsens from MU = 0.

Marginal utility formula

Marginal utility = change in total utility / change in number of units consumed

The first component of the formula calculates the change in total profit. Total utility is subtracted from current consumption with previous consumption.

The second component of the marginal utility formula is the change in the number of units that have been consumed, subtracting the number that is currently being consumed from a quantity previously consumed.

Increasing marginal utility

In certain cases, the marginal utility of a product or service could also be increasing. For example:

- Sheets, which up to a certain number provide only heat, after that point can be helpful in allowing one to escape from a high place by tying them together to form a rope.

- The doses of antibiotics; having too few pills would leave the bacteria more resistant, but a full supply can achieve a cure.

- There is greater satisfaction in finding the second shoe than finding only the first, since the second shoe provides a complete pair of shoes.

- When building a stool, the first two legs seem to have little value because the stool cannot stand. However, there is great value in the third leg, because it is necessary to keep the stool standing.

Decreasing marginal utility

Economists speak of the law of diminishing marginal utility, which means that the first unit of consumption of a product or service has more utility than the second and subsequent units, with a continuous reduction for larger quantities.

The fall in marginal utility as consumption increases is known as decreasing marginal utility. Mathematically: UM1> UM2> UM3…> UMn

Therefore, the first unit of consumption for any product is usually the highest. As consumption of products increases, marginal utility decreases. If the consumption of products continues to increase, the marginal utility at some point can reach zero, reaching the maximum total utility.

If you keep increasing the consumption of units it will cause marginal utility to become negative, which means dissatisfaction.

Decrease in prices

As the marginal utility of a product decreases, as consumption increases, consumers are willing to pay smaller amounts for more products.

For example, suppose a person pays $ 100 for a vacuum cleaner. Because a second vacuum has little value, the same person would be willing to pay just $ 20 for a second vacuum.

The law of diminishing marginal utility has a direct impact on prices, because the price charged for an item must correspond to the marginal utility of the consumer and their willingness to consume or use the product.

Example

A person is quite hungry and decides to buy five slices of pizza. After doing so, the person consumes the first slice of pizza and gets some positive utility from eating it.

Because the individual was hungry and this is the first food they ate, the first slice of pizza is of great benefit. By consuming the second slice, the person's appetite begins to be satisfied.

I was not as hungry as before, so the second slice of pizza had a smaller utility and enjoyment than the first. The third portion is even less useful, since the individual is no longer hungry.

In fact, the fourth slice of pizza has also experienced decreasing marginal utility, as it is difficult to consume because the individual experiences discomfort from being full of food.

Finally, the fifth slice of pizza cannot be consumed. The individual is so full for the first four slices that consuming the last slice of pizza has negative utility.

The five slices of pizza demonstrate the marginal utility that is experienced in the consumption of any product.

References

1. Investopedia (2018). Marginal Utility. Taken from: investopedia.com.
2. Wikipedia, the free encyclopedia (2018). Marginal utility. Taken from: en.wikipedia.org.
3. The Editors of Encyclopaedia Britannica (2018). Marginal Utility. Taken from: britannica.com.
4. Toni Bonton (2018). What is Marginal Utility? - Definition, Theory, Formula & Example. Taken from: com.
5. Tomás VP (2017). Marginal Utility: A human view into behavioral economics. Marketing And Growth Hacking. Taken from: blog.markgrowth.com.
6. Investopedia (2018). Law Of Diminishing Marginal Utility. Taken from: investopedia.com.