Economics
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Boundless Economics
Consumer Choice and Utility
The Demand Curve and Utility
Economics Textbooks Boundless Economics Consumer Choice and Utility The Demand Curve and Utility
Economics Textbooks Boundless Economics Consumer Choice and Utility
Economics Textbooks Boundless Economics
Economics Textbooks
Economics
Concept Version 5
Created by Boundless

Marginal Utility

Marginal utility of a good or service is the gain from an increase or loss from a decrease in the consumption of that good or service.

Learning Objective

  • Define Marginal Utility


Key Points

    • Marginal utility is measured on a per unit basis.
    • Since an individual's utility is rarely measured using cardinal means, calculating a product's marginal value for an individual may be difficult.
    • Instead of trying to calculate a product's marginal value for an individual, economists assign dollar values to products based on their market price. This allows economists to estimate a product's marginal value based on all the consumer's preferences.
    • The idea of marginal value is an important consideration when making production or purchasing decisions. A person should produce or purchase an additional item when the marginal utility exceeds the marginal cost.

Terms

  • marginal

    Of, relating to, or located at or near a margin or edge; also figurative usages of location and margin (edge).

  • cardinal

    Describing a "natural" number used to indicate quantity (e.g., one, two, three), as opposed to an ordinal number indicating relative position.


Full Text

In economic terms, marginal utility of a good or service is the gain from an increase or loss from a decrease in the consumption of that good or service. The idea of marginal value is an important consideration when making production or purchasing decisions. A person should produce or purchase an additional item when the marginal utility exceeds the marginal cost .

Marginal Utility of Housing

The marginal utility of owning a second house is likely less than the marginal utility of owning the first house.

Marginal utility is measured on a per unit basis. When evaluating the marginal utility of any item, it is important to know in what unit utility is measured. The unit is based on the type of activity that you are trying to measure. If you are a consumer of potato chips, you might measure utility based on whether to buy another bag or have another hand full with your lunch. If you are a producer of potato chips, your marginal value might be defined by a pallet of potato chips. In general, marginal value should be measured based on the smallest unit of consumption or production related to the product in question.

It is also important to remember that utility is difficult to quantify since preferences vary based on the individual. Utility is rarely measured in terms of magnitude; utility is normally just about determining which option is the best choice. Since utility is rarely measured using cardinal means, it may seem difficult to determine a product's marginal value. Economists get around this by substituting dollar values. While this may fail to capture a specific individual's preferences and utility, it offers a good approximation based on everyone's collective preferences as defined by the market.

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