You are here

Marginal Utility

17 April, 2015 - 09:37

The amount by which total utility rises with consumption of an additional unit of a good, service, oractivity, all other things unchanged, is marginal utility. The first movie Mr. Higgins sees increases his total utility by 36 units. Hence, the marginal utility of the first movie is 36. The second increases histotal utility by 28 units; its marginal utility is 28. The seventh movie does not increase his total utility;its marginal utility is zero. Notice that in the table marginal utility is listed between the columns fortotal utility because, similar to other marginal concepts, marginal utility is the change in utility as we go from one quantity to the next. Mr. Higgins’s marginal utility curve is plotted in Panel (b) of Figure 7.1 The values for marginal utility are plotted midway between the numbers of movies attended. The marginalutility curve is downward sloping; it shows that Mr. Higgins’s marginal utility for movies declines as he consumes more of them.

Mr. Higgins’s marginal utility from movies is typical of all goods and services. Suppose that youare really thirsty and you decide to consume a soft drink. Consuming the drink increases your utility,probably by a lot. Suppose now you have another. That second drink probably increases your utility byless than the first. A third would increase your utility by still less. This tendency of marginal utility todecline beyond some level of consumption during a period is called the law of diminishing marginalutility. This law implies that all goods and services eventually will have downward-sloping marginal utility curves. It is the law that lies behind the negatively sloped marginal benefit curve for consumerchoices that we examined in the chapter on markets, maximizers, and efficiency.

One way to think about this effect is to remember the last time you ate at an “all you can eat”cafeteriastyle restaurant. Did you eat only one type of food? Did you consume food without limit? No,because of the law of diminishing marginal utility. As you consumed more of one kind of food, its marginalutility fell. You reached a point at which the marginal utility of another dish was greater, and you switched to that. Eventually, there was no food whose marginal utility was great enough to make it worth eating, and you stopped.

What if the law of diminishing marginal utility did not hold? That is, what would life be like in aworld of constant or increasing marginal utility? In your mind go back to the cafeteria and imagine that you have rather unusual preferences: Your favorite food is creamed spinach. You start with that becauseits marginal utility is highest of all the choices before you in the cafeteria. As you eat more,however, its marginal utility does not fall; it remains higher than the marginal utility of any other option.Unless eating more creamed spinach somehow increases your marginal utility for some otherfood, you will eat only creamed spinach. And until you have reached the limit of your body’s capacity(or the restaurant manager’s patience), you will not stop. Failure of marginal utility to diminish would thus lead to extraordinary levels of consumption of a single good to the exclusion of all others. Since wedo not observe that happening, it seems reasonable to assume that marginal utility falls beyond some level of consumption.