Utility and marginal utility help explain how consumers make decisions about what to buy and how much of it to consume.
Understanding utility
What is utility?
In economics, utility refers to the satisfaction, pleasure, or benefit a person derives from consuming a good or service. It is a fundamental concept in microeconomics that helps explain how consumers make decisions.
Utility is subjective, meaning it varies from person to person. What gives one person high satisfaction may not be equally satisfying to another.
Economists measure utility using hypothetical units called utils. These are not real units but are used to represent how much satisfaction a consumer gains.
A key assumption in economic theory is that consumers act rationally and aim to maximize their total utility given the resources available to them, such as time and income.
Utility is central to understanding how consumers allocate their limited income among various goods and services. Consumers will continue to purchase and consume as long as the satisfaction gained outweighs the opportunity cost of what they give up.
Total utility vs. marginal utility
Total utility (TU)
Total utility is the cumulative amount of satisfaction or benefit a person receives from consuming a certain number of units of a good or service.
It represents the overall level of happiness from all units consumed.
For example, if eating one slice of pizza gives 10 utils, and eating a second slice adds another 8 utils, the total utility after two slices is 18 utils.
Total utility typically increases as more units are consumed, but not always at the same rate.
Marginal utility (MU)
Marginal utility is the additional utility gained from consuming one more unit of a good or service.
It measures how much extra satisfaction the consumer receives from increasing consumption by a single unit.
Marginal utility is calculated using the following formula:
Marginal Utility = Change in Total Utility / Change in Quantity ConsumedExample: If total utility increases from 18 to 24 utils when a third slice of pizza is consumed, the marginal utility of the third slice is:
MU = (24 - 18) / (3 - 2) = 6 utilsMarginal utility helps explain the value a consumer places on each additional unit of a good.
Key differences
Total utility accumulates satisfaction, while marginal utility measures the change in satisfaction.
Marginal utility typically decreases as consumption increases, a concept known as diminishing marginal utility.
Total utility can continue to rise even if marginal utility is falling, as long as the marginal utility remains positive.
The principle of diminishing marginal utility
Definition
The law of diminishing marginal utility states that as a person consumes more units of a particular good or service, the additional satisfaction (marginal utility) gained from each new unit declines.
The first unit usually provides the greatest satisfaction.
Each additional unit yields less and less satisfaction.
Eventually, marginal utility can reach zero, and in some cases, even become negative.
This principle reflects a common human experience: enjoying something less as you consume more of it in a short period.
Causes of diminishing marginal utility
Satiation: The consumer becomes more satisfied and may no longer need or want additional units.
Repetition: The novelty or excitement of the good wears off after repeated consumption.
Physical or mental limits: There is a natural cap to how much of something a person can consume or enjoy at one time.
Real-world example: chocolate bars
Consider someone eating chocolate bars:
The first bar might bring 15 utils.
The second bar brings 10 additional utils.
The third bar adds only 5 utils.
The fourth bar might bring 0 utils.
A fifth bar might cause discomfort, giving -5 utils.
This example illustrates how marginal utility decreases and can eventually become negative, while total utility increases at a slowing rate and may eventually decline.
Positive, zero, and negative marginal utility
Positive marginal utility: Additional units still increase total utility, though by a smaller amount.
Zero marginal utility: The consumer gains no additional satisfaction; total utility levels off.
Negative marginal utility: Additional consumption leads to dissatisfaction or discomfort; total utility declines.
Graphing utility and marginal utility
Total utility curve
The total utility (TU) curve helps visualize how satisfaction accumulates with increased consumption.
The TU curve typically slopes upward, showing that total satisfaction increases with consumption.
However, the curve becomes flatter as more units are consumed, showing that each unit adds less to total utility.
The curve peaks when marginal utility reaches zero.
If marginal utility becomes negative, the TU curve slopes downward, indicating a drop in overall satisfaction.
Marginal utility curve
The marginal utility (MU) curve shows the change in satisfaction with each additional unit.
The MU curve slopes downward, reflecting diminishing additional utility.
It may start at a high value and decline with each unit consumed.
The MU curve may cross the x-axis to show when marginal utility becomes zero, and fall below the x-axis to indicate negative marginal utility.
Interpreting utility graphs
X-axis: Quantity of the good consumed.
Y-axis: Utility, either total or marginal.
When the MU curve is positive, TU is rising.
When MU is zero, TU is at its maximum.
When MU is negative, TU is falling.
These graphs help explain why consumers stop consuming a good after a certain point—because the additional satisfaction is no longer worth it.
Applications of diminishing marginal utility
Explains rational consumer behavior
Understanding marginal utility allows economists to explain why consumers spread their spending across multiple goods rather than purchasing only one item.
As marginal utility diminishes with each additional unit, consumers look for other goods that offer higher marginal utility for each dollar spent.
This behavior promotes diversification of consumption.
Example: A person eating pizza will likely stop after a few slices and might choose to buy a drink or dessert instead of continuing to eat more pizza, which brings less and less satisfaction.
Supports the law of demand
The law of diminishing marginal utility is one reason why the demand curve slopes downward.
As consumers buy more of a good, its marginal utility decreases.
Since consumers are only willing to buy more if the price decreases, demand is inversely related to price.
In other words, people are willing to buy more of a product only if the price is lower, because the value they place on additional units declines.
Helps businesses with pricing strategies
Firms consider diminishing marginal utility when setting prices and creating marketing strategies.
Bulk pricing: Offering discounts on larger quantities makes sense because consumers may not value additional units as much. Lowering the price per unit encourages more purchases.
Bundling products: Companies often bundle complementary items to maintain customer interest and provide added utility.
Example: Fast-food restaurants often offer value meals combining a burger, fries, and a drink rather than selling each item separately.
Shapes consumer decision-making
Consumers unconsciously use the concept of marginal utility in daily life, even if they don’t know the economic term.
People intuitively know when something is no longer enjoyable, and they choose to stop.
They make choices based on what gives them the most benefit per dollar or per unit of time.
Rational consumers try to maximize their total utility by allocating resources to the goods that give them the most satisfaction at the margin.
Diminishing marginal utility in multiple consumption choices
While more detailed analysis involving utility maximization across goods appears in later subtopics, it’s helpful to understand how diminishing marginal utility affects spending patterns.
Consumers make choices about multiple goods, not just one.
As the marginal utility of one good falls, they may shift their consumption to another good that provides higher marginal utility.
This principle underlies more advanced topics like the utility-maximizing rule, which balances marginal utility per dollar across different goods.
The idea of diminishing marginal utility remains central: as a person consumes more of any good, the extra satisfaction falls, and the consumer looks for other ways to increase overall happiness.
By understanding and applying the principle of diminishing marginal utility, students can better grasp the reasoning behind real-world decisions, consumer demand, and economic efficiency.
FAQ
While the law of diminishing marginal utility typically holds true, there are rare cases where marginal utility may initially increase before it starts to diminish. This can happen when the first few units of a good do not fully satisfy a basic need or when the consumer is becoming more familiar with the good. For example, the first few minutes of using a new piece of technology might involve a learning curve, so satisfaction may increase as the user gains understanding and enjoyment. Another example could be reading chapters of a novel—the first chapter may offer limited satisfaction, but as the story develops, the reader becomes more engaged and marginal utility increases temporarily. However, this rising marginal utility is usually short-lived, and eventually, diminishing marginal utility sets in. Once the good or activity reaches a point where the consumer feels adequately satisfied or bored, the utility from additional units begins to fall as expected.
Marginal utility is closely related to consumer preferences, as it represents the consumer's valuation of additional units of a good. While marginal utility is a cardinal concept (measured in utils), consumer preferences are often represented using indifference curves, which are ordinal and show combinations of two goods that provide equal satisfaction. Marginal utility influences the shape and slope of these curves. Specifically, the marginal rate of substitution (MRS)—the rate at which a consumer is willing to substitute one good for another—depends on the relative marginal utilities of the goods. For example, if the marginal utility of good X is much higher than that of good Y, the consumer would require a large quantity of Y to give up one unit of X. Although AP Microeconomics doesn’t quantify indifference curves directly, understanding marginal utility helps explain why consumers choose different bundles and how they rank preferences over combinations of goods in pursuit of maximum utility.
Yes, the law of diminishing marginal utility applies to both goods and services. The principle is not limited to physical items—it also holds for experiences and intangible benefits. For instance, consider a consumer watching episodes of a TV show. The first episode might provide high enjoyment, the second slightly less, and so on, until watching additional episodes in a single sitting brings little or no enjoyment. The same applies to services like massages, theme park rides, or even listening to a favorite song. The first exposure may be highly satisfying, but the value of repeating the same experience diminishes over time. Importantly, this diminishing satisfaction is not due to the quality of the service changing, but rather the consumer’s mental or emotional saturation. The application of diminishing marginal utility to services reinforces its role as a universal principle of consumption behavior, applying wherever a consumer derives satisfaction from repeated use or experience of something.
Time is a crucial factor in how diminishing marginal utility operates. The law assumes consumption occurs over a short period, which is why additional units bring less satisfaction due to immediate satiation. However, if the time between units is extended, the consumer's capacity to enjoy the good may reset or refresh, and marginal utility may temporarily increase again. For example, eating three cookies in one minute will likely lead to diminishing satisfaction quickly, but if those same cookies are spaced out over several hours or days, each one might bring relatively higher satisfaction. Similarly, listening to a favorite song repeatedly in a short span may become tiresome, but enjoying it once a day could maintain or even increase marginal satisfaction. In essence, short-term repetition leads to faster utility decline, while longer time intervals can mitigate or delay diminishing returns. Time, therefore, affects not just the magnitude but also the pace at which marginal utility diminishes.
Diminishing marginal utility plays a key role in supporting the economic rationale for progressive taxation, where individuals with higher incomes are taxed at higher rates. The logic is based on the assumption that as a person’s income increases, the marginal utility of each additional dollar decreases. For someone earning $20,000 a year, an extra $1,000 might bring significant utility because it can be used to meet essential needs. However, for someone earning $200,000 a year, that same $1,000 brings much less additional satisfaction. Since the utility of income diminishes, taking a higher percentage of income from wealthier individuals causes less overall loss in total utility than taking the same amount from lower-income individuals. This allows the government to raise revenue with a smaller sacrifice in aggregate utility, which is a key principle in welfare economics. Thus, diminishing marginal utility is often used to justify taxing higher incomes more heavily to promote fairness and social welfare.
Practice Questions
Explain the concept of diminishing marginal utility and how it affects a consumer’s decision to purchase additional units of a good.
The law of diminishing marginal utility states that as a consumer consumes additional units of a good, the extra satisfaction (marginal utility) gained from each new unit decreases. This means that while total utility may still rise, it increases at a decreasing rate. As marginal utility falls, the consumer becomes less willing to pay the same price for more units. This affects purchasing decisions because consumers will only buy additional units if the price falls or if the marginal utility per dollar remains equal to that of other goods, helping them maximize total utility within their budget.
A student receives 20 utils from their first slice of pizza, 15 from the second, and 10 from the third. Using this information, describe the relationship between total utility and marginal utility, and explain what would likely happen if the student continues to eat more slices.
The total utility from three slices of pizza is 45 utils (20 + 15 + 10). The marginal utility is decreasing with each slice, showing diminishing marginal utility: 20 for the first, 15 for the second, and 10 for the third. This means each additional slice gives less added satisfaction. If the student continues to eat more slices, the marginal utility will likely continue to decrease, potentially reaching zero or even becoming negative. At that point, the student would gain no benefit—or even discomfort—from additional slices, and rational behavior would lead them to stop consuming more pizza.
