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The consumer is the ultimate decision-maker in the economy because they decide what to buy to satisfy their wants. As the wants are unlimited to limited resources, the consumer has to follow some rules and policies to attain maximum satisfaction from the limited bundle of goods. There are two approaches for studying consumer behaviour and equilibrium. The cardinal utility approach (Marshall’s cardinal utility analysis) and the ordinal utility approach (Indifference Curve Analysis or Hicksian Analysis).
A consumer is a person who buys goods and services to satisfy his or her wants. They have to follow some rules to attain their maximum satisfaction from the limited bundle of goods. Under the cardinal utility approach, the concept of utility is used to attain the consumer’s equilibrium. Utility refers to the wants satisfying the power or capability of a commodity. Marginal utility is the additional utility derived from the consumption of one more unit of the given commodity. In short, it is the change in total utility when one additional unit is consumed.
Marginal Utility definition
Under the cardinal utility approach, the concept of utility is used to attain the consumer’s satisfaction or wants. The utility is measured in monetary terms. Under utility, there are two concepts. One is total utility, and the other is marginal utility.
Total utility is the satisfaction received from the consumption of all possible units of a commodity. In contrast, the meaning of marginal utility is the additional utility derived from the consumption of one additional unit of a commodity.
Marginal Utility Meaning
Marginal utility is the change in the total utility of a commodity with an increase in consumption units. In short, the formula of marginal utility is MU =ΔTUΔQ or MUn = TUn-TUn-1where MU is the marginal utility and TU is total utility, and n is the number of units of consumption. The concept of marginal utility is used to determine the consumer choice to get maximum satisfaction from the limited bundle they have.
Types of Marginal Utility
The marginal utility can be of three types. They are as followings:
Positive marginal utility: This happens when consuming the additional units of a commodity brings more satisfaction to the consumer.
Negative marginal utility: This occurs when the consumer has got maximum satisfaction from the additional units of a commodity, and consuming more can be harmful to the consumers.
Zero marginal utility: This occurs when the consumer doesn’t get any extra measure of satisfaction from consuming additional units of a commodity.
Relationship between TU and MU
The value of TU rises as the MU has a positive value as the consumption of commodities rises. Due to the law of diminishing marginal utility, the value of MU drops, but the value of TU keeps rising.
Maximum the value of TU, MU drops to zero. At this stage, the curve of TU becomes stable.
The value of TU starts declining, which makes the MU negative, as the consumption reaches the level of satisfaction.
For example, as soon as Rohit reached home, he asked for a glass of glucose. The first glass of glucose will provide him with the best satisfaction, the next a little less and further the graph of satisfaction decreases, and then he will be at a stage where he won’t be in need of glucose. After this point, if he continues to consume more glasses of glucose, that will create disutility or negative MU. This happens due to the presence of the law of diminishing marginal utility.
The law of diminishing utility has universal application, and it is applied everywhere, i.e., every goods and service. H.H. Gossen, a German economist, first proposed this law, and that’s why it is also called ‘Gossen’s first law of consumption.’
The law of diminishing marginal utility is an important tool in the marketing process. The marketers use this tool to detect the marginal utility from their products as the products are sold to satisfy the consumers. If the marginal utility from the products sold is negative, it will cause a loss for the business.
Conclusion
In Economics, the concept of marginal utility is an important term and helps to determine consumer behaviour and consumer equilibrium. As the resources are limited but human wants are unlimited, the consumer tries to get maximum satisfaction from the limited bundle of goods they have. And in this point, the concept of marginal utility comes.
