Marginal utility

AdamSmith

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UtilityQuantified

Richard Whately

Gabriel Cramer

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Jevons

Vilfredo Pareto 1870s2

Marginal utility is a concept in economics that refers to the additional satisfaction or benefit (utility) that a consumer derives from consuming one more unit of a good or service. It is a cornerstone of microeconomics, particularly in the analysis of consumer choice and demand. The principle of marginal utility is used to explain how individuals make decisions to allocate their resources most efficiently.

Concept

The concept of marginal utility is based on the understanding that the utility or satisfaction a consumer gets from consuming goods or services decreases as the quantity consumed increases. This phenomenon is known as the law of diminishing marginal utility. For example, if a person is very thirsty, they derive a high utility from drinking the first glass of water, but the utility gained from consuming subsequent glasses is likely to decrease with each glass.

Calculation

Marginal utility is calculated as the change in total utility divided by the change in the quantity of the good or service consumed. Mathematically, it can be expressed as:

MU = ΔTU / ΔQ

where MU is marginal utility, ΔTU is the change in total utility, and ΔQ is the change in quantity consumed.

Importance

Understanding marginal utility helps in explaining consumer behavior in the market. It is fundamental in determining the demand curve, which shows the relationship between the price of a good and the quantity demanded. The concept also underpins the theory of indifference curves and budget constraints, which are used to analyze consumer choices in a more detailed and nuanced way.

Applications

Marginal utility has applications beyond consumer choice and demand. It is also used in other areas of economics, such as in the theory of marginal utility of income, which suggests that the utility gained from an additional dollar of income decreases as income increases. This concept has implications for understanding income distribution, taxation, and welfare economics.

Criticism and Limitations

While the concept of marginal utility is widely used, it has faced criticism. One of the main criticisms is the difficulty of measuring utility, as it is a subjective experience. Additionally, the assumption of rational behavior in consumer choice has been questioned, with behavioral economics providing evidence that consumers do not always make decisions that maximize their utility.

Conclusion

Despite its limitations, the concept of marginal utility remains a fundamental part of economic theory, providing valuable insights into consumer behavior, market demand, and the allocation of resources.