Capacity of a commodity to satisfy human want is termed as the utility of commodity. There are various forms of utilities like: form, place, time, possession, and information utilities. Further, marginal utility is a measure of the additional satisfaction a consumer derives from consuming one additional unit of goods and services. In this blog, “Marginal Utility: Role and importance” I’m going to explain concept of marginal utility in detail with role and importance.
Utility and satisfaction difference
Actually, utility is different from usefulness and satisfaction though seems similar. Utility is the want satisfying power of a commodity, it is not satisfaction. Satisfaction is the end result of consumption. While, utility is the starting point of consumption. In short, utility is nothing but want satisfying power of given commodity. Whereas, satisfaction is the feeling of satisfaction derived by consumer.
What is Marginal Utility?
Marginal utility is a concept in economics that measures the additional satisfaction or benefit a consumer derives from consuming one additional unit of a good or service. It is the change in total utility resulting from the consumption of an additional unit. After consumption of first unit, marginal utility goes decreasing.
Definition of Marginal Utility:
Marginal utility can be defined as the extra satisfaction or value gained from consuming an extra unit of a product or service.
For example, let’s say you are eating a slice of pizza. The first slice gives you a certain level of satisfaction, let’s say 10 utils. As you eat the second slice, your satisfaction increases, but not as much as the first slice. The second slice might give you 7 utils, bringing your total satisfaction to 17 utils. The third slice might give you 5 utils, and so on. The marginal utility of each additional slice decreases as you consume more.
Role and Importance of Marginal Utility:
Marginal utility plays a crucial role in consumer decision-making and understanding the demand for goods and services. Here are some key points regarding the role and importance of marginal utility:
- Consumer Choices: Marginal utility helps consumers make rational choices by considering the additional satisfaction they will gain from consuming one more unit of a product. It helps consumers allocate their limited resources efficiently.
- Law of Diminishing Marginal Utility: The law of diminishing marginal utility states that as a consumer consumes more units of a good or service, the marginal utility derived from each additional unit decreases.
- Pricing and Demand: Marginal utility also affects pricing and demand. As the marginal utility of a good decreases, consumers are willing to pay less for each additional unit. This influences the demand curve and pricing strategies.
- Optimal Consumption: Marginal utility helps in determining the optimal level of consumption for a consumer. It helps identify the point where the consumer derives maximum satisfaction from the available resources.
Tabular Representation of Marginal Utility:
To understand marginal utility better, let’s look at a tabular representation:
| Units Consumed | Total Utility | Change in Utility | Marginal Utility |
|---|---|---|---|
| 1 | 10 | – | – |
| 2 | 17 | 7 | 7 |
| 3 | 22 | 5 | 5 |
| 4 | 25 | 3 | 3 |
| 5 | 27 | 2 | 2 |
Marginal Utility Curve and Graph:
The marginal utility curve is a graphical representation of the diminishing marginal utility. It shows the relationship between the quantity consumed and the corresponding marginal utility.
The graph generally slopes downwards from left to right, indicating the diminishing marginal utility. Initially, the curve is steep, indicating a significant increase in satisfaction, but it gradually flattens as the quantity consumed increases.
This curve helps economists and businesses understand consumer behavior and make informed decisions regarding pricing, production, and marketing strategies. This is all about Marginal Utility: Role and importance. Hope, by reading this piece of information, you will get better insight of utility concept. Understanding utility in economics/Marginal utility total utility and diminishing marginal utility/Rational people think at the margin/Understanding the law of demand and supply/Trade can make everyone better off
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