Marginal Utility

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Definition of Marginal Utility:

Marginal utility is the satisfaction gained or lost from the consumption of an additional unit. Also referred to as marginal benefit.

Detailed Explanation:

Assume utility is quantifiable on a scale of one to ten. Susan's favorite activity is playing tennis with her friends. In her first hour she would rate that a ten. After the first hour, Susan wants to continue playing, but her satisfaction level would drop to eight. Susan's marginal utility is eight, or the satisfaction she gains in the second hour. Eventually, Susan would be tired or some other activity may be more attractive (i.e. has a higher marginal utility). In theory, when the marginal utility of another activity is higher, Susan would stop playing tennis and pursue the other activity. Notice that Susan's utility drops in the second hour. This illustrates the law of diminishing marginal utility. When purchasing an item, If the marginal utility per dollar spent is higher for Product A than Product B, rational consumers would purchase more of Product A because they would get more “bang for their buck.”

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