Marginal Utility
What is Marginal Utility?
Marginal utility is the additional satisfaction gained from consuming one more unit of a good.
It typically falls as you consume more of a good, a pattern called diminishing marginal utility. Consumers compare marginal utility per dollar across goods to allocate spending. When marginal utility is negative, consuming more actually reduces total utility.
Marginal Utility: a worked example
Suppose a student's total utility from tacos is 24 utils for the first, 42 for two and 54 for three, so the marginal utility of the second taco is 42 − 24 = 18 utils and of the third is 54 − 42 = 12 utils, falling as consumption rises. Now suppose she has eaten two tacos and is choosing what to buy next. A third taco at $3 delivers 12 ÷ 3 = 4 utils per dollar, while a drink costing $2 and worth 14 utils delivers 14 ÷ 2 = 7 utils per dollar, so the money should go to the drink first even though the taco is worth more utils in total.
The mistake students make with marginal utility
Students read diminishing marginal utility as total satisfaction going down, and conclude that a second slice of pizza leaves them worse off than after one slice. Falling marginal utility only means total utility is rising more slowly: while marginal utility is positive, every extra unit still adds something and total utility keeps climbing. Total utility peaks where marginal utility hits zero and only declines once marginal utility turns negative.
Marginal Utility questions
How do you calculate marginal utility?
Marginal utility equals the change in total utility divided by the change in quantity consumed, so total utility rising from 42 to 54 utils when a third unit is eaten means the marginal utility of that unit is 12 utils. When quantity moves one unit at a time, marginal utility is simply the gap between consecutive total utility figures.
What is the utility maximizing rule?
A consumer maximizes utility by spending the whole budget so that marginal utility per dollar is equal across every good, written MUx ÷ Px = MUy ÷ Py. When one good delivers more utility per dollar than another, shifting spending toward it raises total utility until the two ratios meet.
Can marginal utility be negative?
Marginal utility turns negative when an extra unit actually reduces total satisfaction, such as a sixth slice of pizza that makes you feel sick. A rational consumer never buys units in that range, since they lower total utility while still costing money.
Formula / Example
Related terms
The same idea in another course
Diminishing marginal utility is concavityMarginal utility falls because the utility function is concave down, which is a second-derivative statement rather than an economic assumption. On CalcLearn, a sister site.
Common comparisons
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