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Concept
Marginal utility
Summary
In economics, utility refers to the satisfaction or benefit that consumers derive from consuming a product or service. Marginal utility, on the other hand, describes the change in pleasure or satisfaction resulting from an increase or decrease in consumption of one unit of a good or service. Marginal utility can be positive, negative, or zero.
For example, when eating pizza, the second piece brings more satisfaction than the first, indicating positive marginal utility. However, after the third or fourth piece, the satisfaction level starts to decrease, indicating zero or negative marginal utility. Negative marginal utility implies that every additional unit consumed causes more harm than good, leading to a decrease in overall utility. In contrast, positive marginal utility indicated that every additional unit consumed increases overall utility.
In the context of cardinal utility, economists postulate a law of diminishing marginal utility. This law states that the first unit of consumption of a good or service yields more satisfaction or utility than the subsequent units, and there is a continuing reduction in satisfaction or utility for greater amounts. As consumption increases, the additional satisfaction or utility gained from each additional unit consumed falls, a concept known as diminishing marginal utility. This idea is used by economics to determine the optimal quantity of a good or service that a consumer is willing to purchase.
In the study of economics, the term marginal refers to a small change, starting from some baseline level. Philip Wicksteed explained the term as follows:
Marginal considerations are considerations which concern a slight increase or diminution of the stock of anything which we possess or are considering.
Another way to think of the term marginal is the cost or benefit of the next unit used or consumed, for example the benefit that you might get from consuming a piece of chocolate. The key to understanding marginality is through marginal analysis.
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