Question

Define marginal utility. (LO1)

Short answer

Marginal utility is defined as the change in total utility resulting from the consumption of an additional unit of a good or service. In other words, it is the extra satisfaction gained by the consumer when they decide to consume one more unit of a product or service. For example, if a person gains satisfaction from eating a slice of pizza and decides to eat another slice, the marginal utility is the additional satisfaction obtained from consuming that second slice.

Step-by-step solution

Understand the concept of utility

In economics, utility is a measure of the satisfaction or happiness a consumer receives from consuming goods or services. In simpler words, it is the level of satisfaction gained from the consumption of a particular product or service.

Learn about marginal utility

Marginal utility is the additional satisfaction a consumer receives from consuming one more unit of a good or a service. It reflects the change in total utility by the consumption of an incremental unit of a product or service.

Define marginal utility

Marginal utility can be defined as the change in total utility resulting from the consumption of an additional unit of a good or service. It is the extra satisfaction gained by the consumer when they decide to consume one more unit of a product or service.

Provide an example

To understand marginal utility better, let's consider an example. Suppose a person is hungry and decides to eat a slice of pizza. The satisfaction they gain from consuming that slice is their total utility. Now, if they decide to eat another slice, the additional satisfaction from consuming the second slice is the marginal utility of that slice. In this example, the most significant aspect of marginal utility that can be understood is that it helps the consumer determine how the satisfaction from consuming a product or service changes with the consumption of additional units. So, to summarize: Marginal Utility = Change in Total Utility / Change in Quantity of a good or service consumed

Key concepts

Consumption

Consumption is a fundamental concept in economics, focusing on the use of goods and services by households. It represents the process by which items are used to satisfy needs and desires. Consumption is essential because it drives economic activity.

• In a typical scenario, goods are consumed to gain utility, or satisfaction, from their use.
• The act of buying and using products and services is at the core of consumer choice and demand.

Consumers make decisions about what to buy and how much to consume based on the utility they expect to gain.
Economists study consumption patterns to understand how different factors, such as income and preferences, influence purchasing decisions. By examining these patterns, they can make predictions about how changes in the economy will affect consumer behavior.

Total Utility

Total utility is a measure of the overall satisfaction or benefit that a consumer gets from consuming a particular quantity of goods or services. As more of a good is consumed, total utility typically increases but at a decreasing rate.

• Total utility is calculated by summing up the satisfaction gained from consuming various units of a good or service.
• When consumption initially begins, each new unit consumed adds significant utility.

This increase is why consumers often demand more when they first try a product.
Typically, there is a point where consuming additional units adds less satisfaction, known as diminishing marginal utility. This concept is crucial in understanding individual consumption choices and how they contribute to overall market demand.

Satisfaction

Satisfaction in economics refers to how pleased or content a consumer feels after consuming goods or services. It is a subjective assessment that varies from person to person. This concept is closely related to utility, which quantitatively measures satisfaction.

• Achieving higher satisfaction is often the goal of individuals when making consumption choices.
• Factors that can influence satisfaction include price, quality, personal preferences, and experiences.

Understanding satisfaction helps businesses create products and services that better meet consumer needs.
Companies research consumer satisfaction to improve offerings and increase loyalty. High satisfaction levels may lead to repeat purchases and strong brand preference.