Marginal utility

In economics, utility is the satisfaction or benefit derived by consuming a product, thus the marginal utility of a good or service is the change in the utility from increase or decrease in the consumption of that good or service. Economists sometimes speak of a law of diminishing marginal utility, meaning that the first unit of consumption of a good or service yields more utility than the second and subsequent units, with a continuing reduction for greater amounts. Therefore, the fall in marginal utility as consumption increases is known as diminishing marginal utility. Mathematically, MU₁>MU₂>MU₃......>MU_n. The marginal decision rule states that a good or service should be consumed at a quantity at which the marginal utility is equal to the marginal cost.

The term marginal refers to a small change, starting from some baseline level. As Philip Wicksteed explained the term,

Frequently the marginal change is assumed to start from the endowment, meaning the total resources available for consumption (see Budget constraint). This endowment is determined by many things including physical laws (which constrain how forms of energy and matter may be transformed), accidents of nature (which determine the presence of natural resources), and the outcomes of past decisions made by the individual himself or herself and by others.

For reasons of tractability, it is often assumed in neoclassical analysis that goods and services are continuously divisible. Under this assumption, marginal concepts, including marginal utility, may be expressed in terms of differential calculus. Marginal utility can then be defined as the first derivative of Total Utility—the total satisfaction obtained from consumption of a good or service—with respect to the amount of consumption of that good or service.

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