What is Marginal Utility

Enlarge Image Dear Readers,

Economics is usually defined as an art and science of fulfilling human wants with the help of least possible resources. As wants of men get fulfilled, the scarcity of resources also goes on increasing. Marginal utility is a microeconomic concept that concentrates on the human psychology of getting 'bored' of a particular good and service, after deriving the maximum possible utility from it. The Law of Marginal Utility, is an apt equation, that depicts a diminishing utility that mankind derives from a commodity.

The micro-economic theory regarding marginal utility was first propagated by early economic thinkers such as Adam Smith and David Ricardo. The law and theory of utility basically point out the human nature of demanding more and more goods and services for satisfying growing needs. Adam Smith often referred to this concept as the Parody of Value. The demand for goods actually decreases after a surge in the level of satisfaction. The Law of Diminishing Marginal Utility is based on this phenomenon. In order to know the answer to the question, "what is marginal utility?', one first need to grasp the meaning of utility and its classifications.

What is Utility?

Utility is a psychological phenomenon that is used to gauge the satisfaction which is derived from the consumption of goods and services. It must be noted that the level of satisfaction that is derived is abstract and also comparative. There are two basic classifications of utility. For the purpose of explanation, I shall be using the example of apples. Imagine, that you have bought home a set of apples. There are two types of utilities that you can derive from the total amount of apples that you have consumed.

• Total Utility: The total utility is basically the utility that you enjoyed while consuming the entire set of apples.
• Marginal: Marginal utility on the other hand, is the utility that you derived from the consumption of each successive apple. You will notice that the number of apples that you consume, go up with each passing unit that is consumed by you. A point comes, however when you shun the apple. When the utility becomes negative, you shift over to another fruit, instead of the apple.

This phenomenon has been aptly described in the Law of Diminishing Marginal Utility.

Law of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility is known by several other names such as the 'paradox of diamonds' and 'water or paradox of value'. According to the law, "when a person, under normal circumstances, with constant consumption of other commodities, increases the consumption of one single commodity, then there is a gradual rise and gradual fall, that goes into negative counting, is observed in the utility that is derived from the commodity..."

In the diagram, you will notice that the marginal utility that is derived from a particular commodity goes on increasing and then drops, with also influences the drop of total utility that is derived from the same commodity. In short, a person cannot stick to one commodity for a very long time and has to switch to another similar commodity.

There are, however, few limitations of marginal utility. Firstly, there can be no numeric formula for the concept, and secondly, the law is applicable to some commodities such as alcohol or narcotics.