In economics, marginal utility or MW is a way of measuring the level of value or consumer satisfaction when consuming something. In general, MW is equal to the change in total utility divided by the change in the quantity of goods consumed. One common way of looking at this is that MW is the utility that a person gains for each additional unit of a good consumed.
Step
Part 1 of 3: Using the Marginal Utility Equation
Step 1. Understand the concept of economic utility
Utility is the "value" or "satisfaction" that consumers get from consuming a number of goods. In other words, utility is how much money consumers are willing to spend to get satisfaction from using an item.
For example, suppose you are hungry and buy fish for dinner. Suppose also that one fish is valued at Rp. 26,950, -. If you are so hungry that you are willing to pay Rp. 107.800, - for the fish, then the fish is said to have a utility of Rp. 107.800, -. In other words, you are willing to pay IDR 107,800, - to get satisfaction from the fish, no matter what the original price is
Step 2. Find the total utility value of consuming a certain number of goods
Total utility value is a utility concept that is applied to more than one item. If consuming one good can give you a certain amount of utility satisfaction, then consuming more than one of the same good will give you a higher, lower, or the same level of satisfaction.
- For example, you plan to eat two fish. However, after eating the first one, you are no longer as hungry as before. Now, you're only willing to pay IDR 80,850, - for the extra satisfaction you get from the second fish. After the stomach is full, it turns out that the value of the fish decreases. This means, when the two fish are combined, they give a "total utility" value of IDR 80,850, - + IDR 107,800, - (first fish) = IDR 188,650, -
- It doesn't matter if the second fish is actually bought. UM only cares about what you are willing to pay. In reality, economists use complex mathematical models to predict what consumers are willing to pay.
Step 3. Get the total utility value of consuming different goods
To get the UM value, you need two different measures of total utility. Use the difference to make UM calculations.
- Let's say that in the example of the Stage 2 situation, you decide that your stomach feels hungry enough to eat four fish. But apparently, after eating the second fish, the stomach feels a little full, so you only want to pay around Rp. 40,425, - for the next fish. After the third fish, the stomach feels almost completely full, so you only want to pay Rp. 13,475, - for the last fish.
- The satisfaction obtained from this fish is almost cut by a full stomach. It can be said that the four fish above provide a total utility value of IDR 107,800, - + IDR 80,850, - + IDR 40,425, - + IDR 13,475, - = IDR 242,550, -
Step 4. Calculate the ME value
Divide the difference in total utility by the difference in units. The answer is the marginal utility, or the utility value of each additional unit consumed. In this example, you calculate the UM as follows:
- Rp242,550 - Rp188,650 (example from Stage 2) = Rp53,900, -
- 4 (fish) - 2 (fish) = 2
- Rp53,900/2 = Rp26,950, -
- This means, between the second and fourth fish, each additional fish only has a utility value of Rp26,950, for you. This is the average value; the third fish is actually worth Rp. 40,425, - and the fourth is only Rp. 13,475, -, of course.
Part 2 of 3: Calculating UM for Additional Units
Step 1. Use the equation to find the ME value for each additional unit
In the example above, we find the "average" MW value for some of the goods consumed. This is the proper way to use UM. However, it is actually more often used on individual units of goods consumed. This gives us the exact UM value for each additional item (not the average value).
- How to find this is easier than burning above. Just use the normal equation to find the MW when the change in the quantity of the good consumed is "one".
- In the example above, you already know the UM value for each individual unit. When you don't have any fish at all, the ME value for the first fish is IDR 107,800, - (IDR 107,800, - total utility - IDR 0 value owned before/change of 1 unit), the ME value for the second fish is IDR 80,850 (IDR 188,650)., - total utility - Rp107,800, - owned before/change of 1 unit), and so on.
Step 2. Use this equation to maximize your utility
In economic theory, consumers make decisions about how to use their money to maximize utility. In other words, consumers want to get as much satisfaction as possible from the money spent. This means that consumers tend to buy products or goods until the marginal utility value of buying one more good becomes less than the marginal cost (the price of buying one more unit of the good).
Step 3. Determine the missing utility value
Let's look at the example situation above one more time. First we say that each fish is worth Rp.26,950, -. Then we decide that the first fish has a minimum wage of Rp. 107,800, -, the second fish is worth Rp. 80,850, -, the third is worth Rp. 40,425, - and the fourth fish is worth Rp. 13,475, -.
Based on this information, in the end you will not buy a fourth fish. Its marginal utility value (Rp 13,475, -) is less than marginal cost (Rp 26,950, -). Basically, you lose utility on this transaction, so it's not profitable for you.)
Part 3 of 3: Using the Marginal Utility Table
| Ticket Purchased | Total Utility | Marginal Utility |
|---|---|---|
| 1 | 10 | 10 |
| 2 | 18 | 8 |
| 3 | 24 | 6 |
| 4 | 28 | 4 |
| 5 | 30 | 2 |
| 6 | 30 | 0 |
| 7 | 28 | -2 |
| 8 | 18 | -10 |
Step 1. Assign columns for quantity, total utility, and marginal utility
Generally a UM table has at least three of these columns. Sometimes there may be more, but these three columns display the most important information. Usually, it is created and read from left to right.
Note that the column headers will not always be exactly this way. For example, the "Quantity" column might be labeled "Items Purchased," "Units Purchased," or something similar. What matters is the information in the column
Step 2. Notice the trend of diminishing returns
A "classic" ME table is often used to demonstrate that as consumers buy more and more of an item, the desire to buy more decreases. In other words, after a certain point, the marginal utility value of each additional item purchased will begin to decline. In the end, the consumer will start to feel less satisfied overall than before buying that additional item.
In the example table above, this downward trend in yields starts almost instantly. The price of the first entry ticket for entry to the Film Festival provides much marginal utility value, but each additional ticket after the first gives progressively diminishing value. After six tickets, each additional ticket had a negative UM value, and this reduced total satisfaction. The explanation for this may be that after six visits, consumers start to feel bored watching the same movie over and over again
Step 3. Set Maximum Utility Value
This is the point at which the marginal price exceeds the UM value. The marginal utility table makes it easy to predict how many units of the good a consumer will buy. As a reminder, consumers tend to continue buying goods until the marginal price (the cost of buying one additional unit of the same good) is greater than the MW value. If you know how much the item costs analyzed in the table, then the point at which its utility is maximized is on the last line, when UM is worth higher than marginal cost.
- Let's say that each ticket in the example table above costs IDR 40,425, -. In this case, utility is maximized when the consumer pays for 4 tickets. The next ticket after this has a UM value of Rp. 26,950, -, which means it is lower than the marginal cost of Rp. 40,425, -.
- Please note that utility is not always maximized when the UM value starts to become negative. The goods purchased are still likely to benefit consumers without being "value". For example, the fifth ticket in the sample table above still gives a minimum wage of Rp 26,950, -. This is not a negative UM value, but it still reduces the total utility value because it is not worth the cost.
Step 4. Use the table data in the example above to find additional information
Once you get the three "core" columns above, it's easy to get numerical data about the model situation the table is analyzing. This is especially true if you are using a spreadsheet program like Microsoft Excel that is capable of doing the math for you. The following two types of data can be entered into the additional column on the right, after the three main columns:
- Average Utility: The total utility value in each row divided by the quantity of goods purchased.
- Consumer Surplus: The marginal utility value in each line minus the marginal cost of the product. It represents "profit" in the context of the utility that consumers get from buying each product. Also called "economic surplus"
Tips
- It is important to understand that the situation in the example is a modeled or ideal situation. That is, this situation represents an example consumer (not real). If real, consumer behavior is not exactly rational. They probably won't buy as many items as needed to maximize utility. A good economic model is a good tool for broadly predicting consumer behavior, but it often doesn't "fit" in real terms.
- If you add the column “consumer surplus” to your table (as discussed above), the point at which utility is maximized will be at the end of the row, before the value of consumer surplus finally becomes negative.
