Marginal Utility
Marginal utility is the additional satisfaction or benefit—the utility—that a consumer derives from consuming one additional unit of a good or service. It is a central concept in microeconomics and is used to explain consumer choice and the downward-sloping demand curve.[1]
Definition
Marginal utility is defined as the change in total utility resulting from a one-unit increase in consumption:
- Marginal utility = Δ Total utility ÷ Δ Quantity consumed
By contrast, total utility is the overall satisfaction obtained from consuming a given quantity of a good.[1]
Law of diminishing marginal utility
The law of diminishing marginal utility states that, holding other things constant, as more units of a good are consumed, the additional satisfaction derived from each additional unit tends to decline. The first slice of bread, for example, brings far more satisfaction than the tenth. This principle explains why demand curves typically slope downward.[1]
Relationship to other concepts
| Concept | Description |
|---|---|
| Total utility | The overall satisfaction obtained from consuming a quantity of a good. |
| Marginal utility | The additional satisfaction from consuming one more unit. |
| Diminishing marginal utility | The tendency for marginal utility to fall as consumption rises. |
Application
The principle of diminishing marginal utility underpins the equi-marginal principle of consumer choice, which states that a consumer maximises satisfaction by allocating spending so that the marginal utility per unit of money is equal across all goods. It also provides a rationale for progressive taxation and for income redistribution, since a dollar transferred from a rich person to a poor person is assumed to raise total utility when marginal utility declines with income.[1]