What is Marginal Utility?
- When analyzing choices, economists will be "thinking on the margin" (marginal analysis), which simply put means making decisions based on the increments.
- This is thought process is based on marginal utility, which describes the extra utility gained from buying more of a good or service.
- The law of diminishing marginal utility states that the more one consumes of a specific good, the less utility it provides them.
- This leads to a decrease in demand the more consumers have of a product.
- Almost all goods exhibit diminishing marginal utility, however, it can be more or less extreme for specific goods.
- The term "utils" can be used to measure the utility of a product. The more utils a good or service has, the more utility it provides the consumer.
- The more utility a product provides, the more consumers are willing to pay for the product.
- Marginal utility is an artificial term and is hard to measure precisely in reality.
Example
- One toaster is very useful. Two toasters have some use, but having 3 toasters or more is simply a waste of money. Thus there is a limited amount of toasters you can practically sell to people.
- Some goods have far higher marginal utility, for example you need to buy bread weekly as you end up eating it, meaning that it will always have demand.
- Companies have many ways of accounting for or preventing the effects of marginal utility.
- A prime example of this is planned obsolescence.