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What Marginal Utility Says About Consumer Choice

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Andriy Blokhin
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Andriy Blokhin has 5+ years of professional experience in public accounting, personal investing, and as a senior auditor with Ernst & Young.
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Updated August 23, 2023
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Michael J Boyle
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Michael Boyle is an experienced financial professional with more than 10 years working with financial planning, derivatives, equities, fixed income, project management, and analytics.
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Hans Daniel Jasperson has over a decade of experience in public policy research, with an emphasis on workforce development, education, and economic justice. His research has been shared with members of the U.S. Congress, federal agencies, and policymakers in several states.
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In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction a consumer gets. Marginal utility tells how much marginal value or satisfaction a consumer gets from consuming an additional unit of a good.

Microeconomic theory states that consumer choice is made on margins, meaning consumers constantly compare marginal utility from consuming additional goods to the cost they have to incur to acquire such goods. A consumer buys goods as long as the marginal utility for each additional unit exceeds its price. A consumer stops consuming additional goods as soon as the price exceeds the marginal utility.

Key Takeaways

  • Utility represents the amount of satisfaction a consumer gets from consuming a good or service.
  • Marginal utility examines the value of additional satisfaction a consumer gets from consuming an additional unit of a good or service.
  • Economic theory asserts that consumers make spending decisions based on the marginal utility derived from goods and services.
  • Consumers buy goods as long as the marginal utility for each additional unit exceeds its price. They consume additional goods as soon as the price exceeds the marginal utility.
  • Marginal utility is related to total utility, which measures the total satisfaction that a consumer receives from consuming a good or service.


Law Of Diminishing Marginal Utility

Law of Diminishing Marginal Utility

In microeconomics, marginal utility and the law of diminishing marginal utility are the fundamental blocks that provide insight into the consumer choice of quantity and type of goods to be consumed.

The law of diminishing marginal utility states the marginal utility from an additional unit of consumption declines as the quantity of consumed goods increases. Consumers choose their baskets of goods by equating marginal utility of a good to its price, which is a marginal cost of consumption.

Once a consumer's marginal utility is no longer positive, they are no longer willing to pay the same amount for a good or service, decreasing their demand for that good or service.

While marginal utility is positive, then total utility increases with the consumption of each additional good or service.

Law of Demand

The price a consumer is willing to pay for a good depends on its marginal utility, which declines with each additional unit of consumption, according to the law of diminishing marginal utility. Therefore, the price decreases for a normal good when consumption increases.

The price and quantity demanded are inversely related, which represents the fundamental law of demand in consumer choice theory. This can help businesses set the prices for their goods and services to encourage consumers to return.

How Is Marginal Utility Calculated?

Marginal utility is calculated by dividing the change in total utility by the total change in the number of units consumed.

What Is the Difference Between Total Utility and Marginal Utility?

Total utility measures the total, or aggregate, satisfaction that a consumer receives by consuming a good or service whereas marginal utility measures the increase or decrease in satisfaction that a consumer receives by consuming an additional unit of a good or service.

Is Marginal Utility the Price?

Marginal utility is not the price but can help determine the price. Marginal utility determines the price a consumer is willing to pay for a good or service. The price a consumer is willing to pay for an additional good or service decreases with each additional unit of consumption.

What Is an Example of Marginal Utility?

Suppose John is very hungry and decides to eat a cheeseburger that costs $5. John is hungry and looking forward to eating a cheeseburger and is happy to pay $5 for it. After eating the cheeseburger, John is still very hungry and really liked the cheeseburger. He is willing to pay $5 for another one. His marginal utility is still positive. When thinking about having a third cheeseburger, John is still a little hungry, but also not ready to have another cheeseburger. He is not willing to pay $5 for another one; his marginal utility has decreased.

The Bottom Line

Marginal utility helps assess consumers' spending patterns, which has wide-ranging effects, such as helping businesses determine how to set prices for their goods and services. Consumers must carefully determine how they spend their money and they will always direct it towards where they are receiving the most utility.

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