Marginal utility
Marginal utility is an economic concept that refers to the additional satisfaction or pleasure a consumer derives from purchasing one more unit of a good or service. It is crucial for understanding consumer behavior, as it helps economists predict how much of a product a consumer is likely to buy. When consumers make purchasing decisions, they evaluate the marginal utility gained from additional units against the price they have to pay. Generally, the principle of diminishing marginal utility suggests that as a consumer acquires more units of a product, the satisfaction gained from each additional unit tends to decrease. For instance, while the first banana may provide substantial satisfaction, the second banana may offer less, and purchasing many more may even result in negative satisfaction, such as waste from overripe fruit.
This framework not only aids in assessing consumer choices but also influences pricing strategies and demand modeling within an economy. Importantly, the perceived utility can vary significantly among individuals, as preferences and enjoyment levels differ. By measuring utility in hypothetical units called "utils," economists can quantitatively express changes in consumer satisfaction, thereby gaining insights into market dynamics. Overall, marginal utility serves as a fundamental concept in economics, shedding light on the intricate relationships between consumer choices, satisfaction, and market behavior.
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Marginal utility
Marginal utility describes the additional amount of satisfaction consumers receive from purchasing additional units of a good or service. Economists use marginal utility to understand how many units of a good or service a consumer is likely to purchase. Marginal utility helps economists understand consumer behavior. It also helps them make inferences about supply and demand and other important economic factors. Marginal utility can be positive or negative, meaning purchasing a product or service can bring satisfaction, or it can cause dissatisfaction. Total utility describes the total amount of satisfaction a person receives from buying a good or service.
Background
Marginal utility is a concept in economics. Economics is a social science, and it examines the production and consumption of goods. Economists use ideas such as marginal utility to understand how people will most likely act in an economy. In economics, the concept of utility refers to the value consumers get from products they buy. The value consumers receive can be thought of as the satisfaction or happiness they get from the product. Consumers have to make choices every day about the products and services they will spend their money on. Economists base all their assumptions on people acting rationally. Therefore, economists believe that consumers will act in the way that gives them the most utility for their money. Economists use the idea of marginal utility to help them understand the total utility consumers gain from purchasing goods and services. The common applications of marginal utility include tracking consumer behavior regarding the consumption of goods, making pricing decisions, and in product innovation.
Overview
Marginal utility is the change in satisfaction consumers get from purchasing additional units of the same product. Economists are interested in consumer satisfaction when customers purchase a good, but they are also interested in the change in satisfaction if a consumer purchases more than one unit of the same good or service. For example, Consumer A may buy a banana at the store. The consumer was hungry for a banana and received satisfaction when purchasing the first banana. An economist interested in marginal utility would be interested in how much additional satisfaction the consumer would receive from buying a second banana. Consumer A received double the amount of goods by purchasing the second banana; however, Consumer A would not likely double the utility, or satisfaction, by purchasing a second banana if one was sufficient to curb feelings of hunger. The amount of utility added by purchasing a second banana is the marginal utility. Marginal utility may be added with the purchase of each additional item.
Economists are also interested in total utility, which is adding up the utility and marginal utility of all the units purchased of a good or service. Goods and services have diminishing marginal utilities. That means that the consumer receives a little less satisfaction with each additional purchase of a good or service. Consumer A might have found a great deal of satisfaction in purchasing the first banana, but that person might not have found much utility when purchasing a second banana. Eventually, purchasing additional bananas will no longer add any utility. Consumer A most likely will not find any utility from purchasing a fiftieth banana. In fact, Consumer A might experience negative marginal utility if that person buys more bananas than can be used. Negative marginal utility measures the dissatisfaction a person has from buying a good or service. Positive marginal utility describes the additional benefit of purchasing a particular good or service. Negative marginal utility describes the negative effects consumers feel when they purchase additional units of a good or service. An individual who purchases a large bunch of bananas only to throw many away when the fruits become overripe will likely have negative marginal utility.
Marginal utility is an important concept for understanding the way demand works in an economy. Consumer B buys a coffee for $4. Consumer B enjoys coffee, and she receives a great deal of utility from her first coffee. She received enough utility to justify the $4 she spent. She really likes coffee, so she buys a second cup for another $4. She receives slightly less utility from the second cup. However, the marginal utility that she receives is enough to justify the $4 she spent. However, she decides not to purchase a third cup of coffee for $4. She does not believe that the utility she will receive from a third cup will be enough to make her comfortable spending $4 on another. Just before Consumer B leaves the coffee shop, however, the coffee goes on sale. The same cup of coffee she purchased for $4 earlier is on sale for $2 per cup. Consumer B decides to buy a third cup of coffee because the price is lower. The marginal utility of the third cup was not enough (for her) to justify spending another $4. However, she found enough marginal utility in a third cup to justify spending $2. That shows lower prices will increase demand. A lower price means that more people can justify buying a product for the amount of marginal utility they will get from it. It is important to understand, however, that utility and marginal utility change from person to person. Some people enjoy drinking many cups of coffee each day. For them, the marginal utility of each additional cup might be fairly high. Other people do not like as much coffee, and the marginal utility of each additional cup will be very low. The people who experience a much lower marginal utility from each additional cup will most likely not make additional purchases.
Because economists assume that consumers will act rationally, they presume that consumers will act in a way that will maximize their utility. In other words, economists believe that consumers will act in ways that will get the most value for their money. Economists try to show this idea using marginal utility and by measuring utility in arbitrary units that some economists called “utils.” Economists measure utility in utils, so they have a defined unit to talk about something that does not have a measurable value. In the example above, an economist might say that Consumer B gained 40 utils for her first cup of coffee. She received 20 utils from purchasing her second cup of coffee. She received 10 utils for her third. For Consumer B, gaining 10 utils was worth spending $2 but was not worth spending $4.
Bibliography
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