Consumer Behavior

Marginal Utility

Marginal utility measures the incremental benefit of consuming one more unit of a good.
In addition to having a measure of how happy a particular quantity of a good makes a consumer, it is also helpful to know how much incremental happiness, or utility, comes from the last unit of consumption. Marginal utility is helpful to determine the choices consumers will make. For example, while utility can describe how happy three computers makes a person in total, it would also be nice to know how much the third computer added to the consumer's happiness. Marginal utility (MU) is the incremental utility associated with consuming one additional unit of a good. Marginal utility impacts consumer choice because individuals may be less apt to buy multiple quantities of something even if it has a high utility. This impacts business choices and the number of products made in factories. Marginal utility represents the incremental utility one gets from consuming one additional unit of a good (or, put a similar way, consuming the last unit of a good).
MU=ΔUΔQMU=\frac{\Delta U}{\Delta Q}
In the marginal utility formula, U represents utility (i.e., total utility) and Q represents the quantity consumed. For example, if owning 3 computers gives a utility of 10 and owning 2 computers gives a utility of 8, then the marginal utility of the third computer is (108)(32)=2\frac{(10\;-\;8)}{(3\;-\;2)}=2 .

Note the formula can be used even if the change in quantity consumed is not equal to 1. Because the formula is based on a change in quantity, the change in quantity might not be equal to 1.

If there is information on all quantities consumed (or at least all whole-number quantities), the marginal utility formula could be written as:
MU(Q)=TU(Q)TU(Q1)MU(Q)\;=\;TU(Q)\;-\;TU(Q-1)
In this formula, MU(Q) represents the marginal utility of the Qth unit consumed, TU(Q) represents the total utility of consuming Q units, and so on. The concept of marginal utility is an important component in the rational decision-making model (a model showing how individuals make consumer decisions based on a logical thought process). Marginal utility is the change in total utility when one more unit of a good is consumed. As in the example of computers, total utility is impacted when someone purchases 10 computers; he or she is more happy (has a higher utility) than someone with one computer.