What is Marginal Utility?

Vlada February 02 2022

When you buy something, you want it to make the world better. The price is the amount of money that someone else wants for their thing. The price is how much they will give up for you to have it. Utility tells how happy people are with what they have. It helps decide if people want to spend their money on things or save it as a rainy day fund.

A Utility is a measure of how much you are willing to spend on something. Economists and business analysts use this to help them decide what the economy will do. You always need to consider utility when you are deciding if you want to buy something or not.

Understanding it will help you make good decisions about buying things for your own business, or helping other people's companies by making recommendations about prices and behavior.

What Is Marginal Utility?

Marginal utility is the amount of satisfaction you feel after you have one more of something. So if you have two sodas, and then you have three, your total satisfaction goes up by two.

But if you have four sodas, and then five, your total satisfaction only goes up by one. That's because after four sodas, you start to feel sick, and so having one more doesn't make you as happy.

Why Is Marginal Utility Important?

When people are happy with a product or service, they are more likely to buy it again. For example, a snack company makes a new sandwich cookie with a flavor that no one has ever tried before. The cookies are only distributed to test markets.

After some time has passed, people review the cookies online and say that they love them. Most of the cookies are sold quickly because people buy multiple units at once. This tells the company that people like the new flavor, so they can make more of them and sell them in other places too. It is important to know how to calculate marginal utility.

Utility can be seen as the value a customer puts on a particular good or service. In simple terms, it can be defined as how much an individual is willing to pay for a good.

For example, an art collector notices on social media that the work of one of his favorite artists is at an auction. The collector races to the auction, ready to write a check.

Although the starting bid is $800, he immediately bids $5,000 to ensure his acquisition of the piece. Because the piece grants him a great deal of satisfaction, he places more worth or value on it.