After you have worked through this section of the learning unit, you should be able to:
- explain the concept marginal utility
- explain and illustrate with the aid of an example and diagram the law of diminishing marginal utility
- describe the relationship between marginal utility and total utility
Marginal utility is the amount of additional utility the person receives from the consumption of additional units of a good or service. This is the extra satisfaction gained from the consumption of an extra unit of a good or service.
It is calculated as follows:
$$\text{Marginal Utility} = {\text{change in total utility} \over \text{change in the number of units consumed}}$$
In symbols it can be written as:
$$\text{MU} = {TU_2 - TU_1 \over Q_2 - Q_1}$$
where
TU is the total utility
Q is the number of units consumed
The following table indicates the marginal utility for Marcel:
Total and marginal utility schedule
| Number of chocolates consumed | Total utility (utils) | Marginal utility (utils) |
|---|---|---|
| 0 | 0 | 0 |
| 1 | 8 | 8 |
| 2 | 14 | 6 |
| 3 | 19 | 5 |
| 4 | 23 | 4 |
| 5 | 26 | 3 |
| 6 | 28 | 2 |
| 7 | 29 | 1 |
| 8 | 29 | 0 |
| 9 | 25 | -4 |
For the first unit, he obtains eight utils, for the second unit, six utils (14 utils – 8 utils), for the third unit, four utils (23 – 19) and so on. Notice that for the ninth unit, his marginal utility is -4 since his total utility decreases from 29 to 25.
Study the table and answer the following question:
What happens to Marcel’s marginal utility? It ________ as he consumes more chocolates.
Correct.
As you can see from column 3, as he eats more chocolates, his marginal utility declines: 8, 6, 5, 3, 2, 1, 0, -4.
Think again.
As you can see from column 3, as he eats more chocolates, his marginal utility declines: 8, 6, 5, 3, 2, 1, 0, -4.
This decline in marginal utility can now be summed up by the law of diminishing marginal utility, which states that the marginal utility or extra satisfaction gained from consuming a good or service declines as more of a good is consumed in a given period.
The additional unit consumed is less satisfying than the previous one. The law provides an understanding of the demand curve and the law of demand. The reason the demand curve slopes downward, as we will later explain in more detail, is the diminishing marginal utility. If each additional unit of a good or service is less satisfying, then the consumer is only prepared to purchase an additional unit at a lower price than the previous one.
Let's plot Marcel's marginal utility as a graph:
His marginal utility of chocolate is measured on the vertical axis, while the quantity of chocolates is measured on the horizontal axis.
Total and marginal utility schedule
By combining the points, we obtain the marginal utility curve.
This diagram also demonstrates the law of diminishing marginal utility, which indicates that the marginal utility or extra satisfaction gained from consuming an additional good or service, declines as an individual consumes more of the good or service in a given period.