Marginal utility is the amount of incremental utility that is added to the consumption of each subsequent unit of good. The very concept of utility, despite its abstract nature, has long been used in economic theory to determine the degree of pleasure, satisfaction, or benefit that people receive from the consumption of certain goods.
The theory of marginal utility arose in the second half of the 19th century as an alternative to the concept of the labor theory of value. It was developed by representatives of the Austrian school: E. Böhm-Bawerk, K. Menger, J. Schumpeter, F.F. Wieser, as well as A. Marshall, W. S. Jevons and L. Walras.
Its essence is that the main factor affecting the value of a product is its marginal utility, which depends, in turn, on a person’s subjective assessment of their needs. For clarity, consider the following example. Suppose a millionaire is in the Sahara desert and at a temperature of about 40 ° he is very thirsty. In the pocket of his trousers is a handful of diamonds. And then a Bedouin with a wineskin appears and offers to exchange diamonds for water. What in this case will be of great value to a person? Obviously, water, since without it he risks dying.
Take another example. Imagine that on a hot July day, an ice cream kiosk caught your eye and you decided to purchase one package. Then, having eaten the first portion, they bought a second, because they still want ice cream, although not so much. After the second package, you are already starting to think: buy a third or not. And if someone offers to eat a fourth or fifth, then you are unlikely to agree. This example describes the law of diminishing utility, which states that as a person's needs are saturated , the usefulness of a thing for him decreases.
Supporters of marginal utility theory believe that the consumption of any product or service is “incremental” in nature. This means that the buyer, as a rule, is not guided by the principle of "all or nothing," but gradually increases the number of goods or services consumed until he satisfies his need.
Thus, knowing what marginal utility is, we can draw three main conclusions:
- For the consumer, each additional product carries additional utility, which is usually called “marginal”.
- The more goods a buyer has managed to consume, the less useful each subsequent unit of this product is for him. Thus, we can safely say that marginal utility is of a decreasing nature. And between the value of the product and marginal utility, there is an inverse relationship. Its essence is that the less a person has goods (good), the more valuable this product is for him. It turns out that its value is determined by the degree of usefulness that the last unit of this good has, which can satisfy the least urgent need.
- When consuming a certain number of units of a product (for example, ice cream), a person receives a sum of utilities decreasing each time. In economic theory, it is customary to call the conditional unit of marginal utility "Utility." If the consumption of the first ice cream gives a person a usefulness of 7 utahs, the second 6, the third 5, and the fourth 4 utah, then the total usefulness of these products will be 22 utahs (and the marginal utility will be 4 utahs). The rejection of each next portion of ice cream will represent a decrease in the total (total) utility and a simultaneous increase in the marginal utility of the last package. For example, if a person abandons the fourth portion, then the total utility (TU) will be 18 units, and the marginal utility (MU) will be 5, if you refuse the third portion, TU will be 13 units, and MU will increase to 6, etc. .