# Understanding Marginal Utility: Definition, Types, and Economic Impact

## What Is Marginal Utility?

Understanding marginal utility is key to grasping consumer behavior and economic decision-making. It refers to the additional satisfaction or benefit a consumer experiences when they consume one more unit of a good or service. This pivotal concept helps economists assess the desire consumers have for purchasing more of an item.

When consumers experience positive marginal utility, each additional unit consumed increases their overall satisfaction. Conversely, negative marginal utility happens when an extra unit diminishes overall satisfaction. Recognizing these dynamics allows businesses, governments, and consumers to make informed, strategic choices in the market.

### Key Takeaways

*   Marginal utility is the added satisfaction from consuming one more unit of a good or service, which can be positive, negative, or zero.
*   The law of diminishing marginal utility explains that as consumption increases, the satisfaction derived from each additional unit decreases.
*   Understanding marginal utility helps businesses set prices, create products, and increase consumer satisfaction by optimizing the value offered to consumers.
*   In economics, the concept of marginal utility supports the rationale for progressive taxation, as additional income provides less satisfaction to higher earners than to those with lower incomes.

  

![Marginal Utility](https://www.investopedia.com/thmb/23bpfIOFqC-L2L1upTxqtRPN_Lg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/marginalutility-cff85ddfd620484f8afbf9d3f6cf4b74.jpg)

*— Investopedia / Dennis Madamba*

## An In-Depth Look at Marginal Utility

Economists use marginal utility to understand how satisfaction impacts consumer choices. Economists also recognize the [law of diminishing marginal utility](https://www.investopedia.com/terms/l/lawofdiminishingutility.asp). It describes how the first unit of consumption of a good or service carries more utility than later units.

> **Important**
>
> Although marginal utility tends to decrease with consumption, it may or may not ever reach zero, depending on the good consumed.

Marginal utility is useful in explaining how consumers make choices to get the most benefit from their limited budgets. In general, people will continue consuming more of a good as long as the marginal utility is greater than the [marginal cost](https://www.investopedia.com/terms/m/marginalcostofproduction.asp). In an efficient market, the price equals the marginal cost. That is why people keep buying more until the marginal utility of consumption falls to the price of the good.  

## Exploring the Varieties of Marginal Utility

There are multiple kinds of marginal utility. Three of the most common ones are as follows:

### Positive Marginal Utility

Positive marginal utility occurs when having more of an item brings additional happiness. Suppose you like eating a slice of cake, but a second slice would bring you some extra joy. Then, your marginal utility from consuming cake is positive.

### Zero Marginal Utility

Zero marginal utility is what happens when [consuming more of an item](https://www.investopedia.com/ask/answers/072815/what-does-marginal-utility-tell-us-about-consumer-choice.asp) brings no extra measure of satisfaction. For example, you might feel fairly full after two slices of cake and wouldn't really feel any better after having a third slice. In this case, your marginal utility from eating cake is zero.

### Negative Marginal Utility

Negative marginal utility is where you have too much of an item, so consuming more is actually harmful. For instance, the fourth slice of cake might even make you sick after eating three pieces of cake.

## The Historical Development of Marginal Utility

The concept of marginal utility was developed by economists who were attempting to explain the economic reality of price, which they believed was driven by a product's utility. In the 18th century, economist [Adam Smith](https://www.investopedia.com/updates/adam-smith-economics/) discussed what is known as "[the paradox of water and diamonds](https://www.investopedia.com/ask/answers/032615/how-can-marginal-utility-explain-diamondwater-paradox.asp)." This paradox states that water has far less value than diamonds, even though water is vital to human life.

This disparity intrigued economists and philosophers around the world. In the 1870s, three economists—William Stanley Jevons, Carl Menger, and [Leon Walras](https://www.investopedia.com/terms/w/walras-law.asp)—each independently came to the conclusion that marginal utility was the answer to the water and diamonds paradox. In his book, "The Theory of Political Economy", Jevons explained that economic decisions are made based on "final" (marginal) utility rather than [total utility](https://www.investopedia.com/terms/t/totalutility.asp).

## Practical Examples of Marginal Utility in Action

David has four gallons of milk, then decides to purchase a fifth gallon. Meanwhile, Kevin has six gallons of milk and likewise chooses to buy an additional gallon. David benefits from not having to go to the store again for a few days, so his marginal utility is still positive. On the other hand, Kevin may have purchased more milk than he can reasonably consume, meaning his marginal utility might be zero.

The chief takeaway from this scenario is that the marginal utility of a buyer who acquires more and more of a product steadily declines. Eventually, there is [no additional consumer need](https://www.investopedia.com/ask/answers/072815/what-does-marginal-utility-tell-us-about-consumer-choice.asp) for the product in many cases. At that point, the marginal utility of the next unit equals zero and consumption ends.

## Comparing Marginal Utility and Total Utility

Marginal utility measures the change in satisfaction from consuming one additional unit. Total utility, instead, measures the total amount of satisfaction you get from all the units you consume of a good or service. Marginal utility affects total utility. Positive marginal utility causes total utility to increase, while negative marginal utility decreases total utility.

For example, if you go to five sessions with a personal trainer, you might get the highest level of satisfaction from the novelty and excitement of the first session. With each additional session, the marginal utility decreases because you are less excited and doing more strenuous work. But the marginal utility of each is positive, so your total utility is still increasing.

## Calculating Marginal Utility: A Step-by-Step Guide

You can calculate marginal utility by dividing the change in total utility (TU) by the change in number of units (Q):

![marginal utility formula](https://www.investopedia.com/thmb/9mdBI-lPsRd-s5Ebcu7a9iysLko=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/MarginalUtilityFormula-833763c536dd42acae3eaec261812e87.png)

**

Calculate the change in total utility by subtracting the previous total utility from the current one (TU2 - TU1). Change in number of units is found by subtracting the previous number of units from the current number of units (Q2-Q1).  

## Real-World Applications of Marginal Utility

Marginal utility is used to make a variety of economic decisions by governments, businesses, and consumers.

### Consumers

Consumers seek out products with higher marginal utility. Because their satisfaction remains high with each additional unit purchased, they are more likely to make further purchases. They are also more likely to buy similar products from the same company, expecting them to have a similarly high level of marginal utility.

Higher marginal utility often results in greater customer satisfaction as consumers may feel they get more than their money's worth. This can lead to brand loyalty over time, as well as word-of-mouth recommendations.

### Businesses

Products that offer a higher level of satisfaction over time, and after the first time they are used, offer a higher level of marginal utility. This makes them more valuable to customers, so they can be priced higher for greater profits. This can also serve as a guide for businesses to create better products and increase customer satisfaction by focusing on products that offer higher marginal utility.

Marginal utility helps businesses decide which products to improve or upgrade. A product or service that already has a high level of marginal utility becomes even more valuable when it is improved, allowing businesses to continue increasing the price over time or for newer models. For example, if a car manufacturer has an SUV that is already a top seller, they can create trim levels with additional features or upgrades. Because the original version is already popular, with a high marginal utility, customers are more likely to pay the increased price for an even more premium version.

### Governments

The law of diminishing marginal utility is often used to justify [progressive taxes](https://www.investopedia.com/terms/p/progressivetax.asp). The idea is that higher taxes cause less loss of utility for someone with a higher income. Here, everyone experiences diminishing [marginal utility from money](https://www.investopedia.com/ask/answers/072815/what-marginal-utility-income.asp). Suppose that the government must raise $10,000 from each person to pay for its expenses. If the average income is $60,000 before taxes, then the average person would make $50,000 after taxes and have a reasonable standard of living.

However, asking people making only $10,000 to give it all up to the government would be unfair and demand a far greater sacrifice. That is why poll taxes, which require everyone to pay an equal amount, tend to be unpopular.

Also, a [flat tax](https://www.investopedia.com/terms/f/flattax.asp) without individual exemptions that required everyone to pay the same percentage would impact those with less income more because of marginal utility. Someone making $15,000 per year would be [taxed into poverty](https://www.investopedia.com/terms/f/fpl.asp) by a 33% tax, while someone making $60,000 would still have about $40,000.

## What Is the Formula for Marginal Utility?

The formula for marginal utility is change in total utility (ΔTU) divided by change in number of units (ΔQ): MU = ΔTU/ΔQ.

## What Is the Law of Diminishing Marginal Utility?

The law of diminishing marginal utility is a law of economics that states that as your consumption increases, the satisfaction you derive from each individual unit decreases. This is why [consumers are willing to pay](https://www.investopedia.com/ask/answers/042015/what-are-different-ways-utility-measured-economics.asp) the most for the first unit of something they buy, but after a point, they often will not buy additional units without a decrease in price.

## What Is Marginal Cost?

Marginal cost is the change in production cost from producing or making one additional unit. You can find it by dividing the change in production costs by the change in quantity produced. If the price per unit is higher than the marginal cost, a business can make a profit. Tracking marginal costs allows businesses to achieve economies of scale.

## The Bottom Line

Marginal utility is the [amount of additional satisfaction](https://www.investopedia.com/ask/answers/073115/what-difference-between-marginal-utility-and-marginal-value.asp) that a consumer gets from having one more unit of a good or service. This amount can be positive, negative, or zero. When marginal utility equals zero or becomes negative, the consumer will stop buying because the value of what they are buying has stopped increasing.

As an economic concept, marginal utility can be used by businesses to understand customer behavior, set prices for goods and services, and decide which products to innovate or upgrade.

Marginal utility is also used in economics to justify progressive taxes. According to marginal utility, each additional dollar is more valuable to those with lower incomes because they have fewer dollars in total. For those with higher incomes, the marginal utility of each extra dollar of income is lower. This is an application known as the law of diminishing marginal utility.

> **Article Sources**
>
> 1.  Internet Archive. "[Adam Smith Wealth of Nations](https://archive.org/details/AdamSmithWealthOfNations/page/n29/mode/2up?)," Page 30.
>     
> 2.  William Stanley Jevons. "The Theory of Political Economy." Sentry Press, Reprinted 1965.
>     
> 3.  Corporate Finance Institute. "[What Is the Law of Diminishing Marginal Utility?](https://corporatefinanceinstitute.com/resources/knowledge/economics/law-of-diminishing-marginal-utility/)"