A Business Encyclopedia

Marginal Utility

Definition: The Marginal Utility refers to the additional benefit (utility) a consumer derives from the consumption of one additional unit of good or service.

In other words, marginal utility is the addition to the total utility resulting from the consumption of one additional unit of the commodity. Thus, it can be measured as the change in the total utility obtained from the consumption of an additional unit, say X, Symbolically it can be represented as:

Marginal UtilityWhere, TUx is the total utility and ΔQx is change in quantity as a result of consumption of an additional unit.

When ‘n’ number of units are consumed, then the marginal utility can be measured as:

MU of nth unit = TUn – TUn-1

The marginal utility is positive when the consumption of an additional unit of good or service results in the increase in the total utility. On the other hand, it is negative when the additional unit consumed results in the decrease in the total utility. The concept of marginal utility is based on the notion that the utility derived from the consumption of an additional unit of the commodity has an inverse relation to the number of units of that commodity an individual already owns.

Such as, if the consumer keeps on buying the additional unit of the product, then his marginal satisfaction derived from each unit will reduce. For example, if you are very thirsty then the utility derived from the first glass of water will be maximum and will go on diminishing with each additional glass. This is called as the Law of Diminishing Marginal Utility.

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