Ways to Marginal Usefulness

In economics, marginal utility (MU) is a measure of the value or satisfaction a consumer obtains from consuming a certain product. As a general rule, MU is equal to the change in total utility divided by the quantity of the good consumed. ^{[1] X Research Source} MU is generally understood as the utility a person will receive from each additional unit of a good consumed.

Table of Contents

Using the Marginal Utility Equation

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Understand the economic concept of utility. Utility is the “value” or “satisfaction” a consumer obtains from consuming a certain quantity of a good. Utility can be understood as the amount a consumer can pay for the satisfaction that a good provides. ^{[2] X Research Source}

For example, suppose that you are hungry and buy fish for dinner. At the same time, a fish costs 40,000 VND. If you are so hungry that you can pay 160,000 VND for a fish, then the usefulness that fish brings is equivalent to 160,000 VND. In other words, you are willing to pay 160,000 VND for the satisfaction that fish brings, regardless of its actual price.

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Find the total utility from consuming a given quantity of a good. Total utility is just the concept of utility applied to more than one unit of a good. If consuming one unit of a good gives you a certain level of utility, consuming more than one can give you a higher, lower, or equal utility. ^{[3] X Research Sources}

For example, suppose you intend to eat two fish. However, after eating the first one, you no longer feel as hungry as before. Now, you only pay 120,000 VND for the extra satisfaction that the second child brings. Once you’ve started to fill up, fish isn’t worth as much to you as it used to be. This means that together they yield 120,000 dong + 160,000 dong (first one) = 280,000 dong “total usefulness”.
Note that it doesn’t matter whether you actually buy the second fish or not. MU is only concerned with how much you can pay for it. In fact, economists use complex mathematical models to predict how much consumers are likely to pay for certain products or services.

Calculate MU for Extra Units

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Use the equation to determine MU for each additional unit of the good. In the above example we determine the average MU for some goods consumed. Here is one way to use MU. However, in practice MU is often applied more per unit of consumer goods. This gives us the specific MU that each additional unit of good yields (rather than the average value). ^{[6] X Research Source}

To calculate MU for each additional unit of goods is not difficult. You only need to use the ordinary equation to find MU when the change in quantity of the good consumed is one .
In the example situation, you already know the MU for each unit. When you haven’t eaten anything, the MU of the first fish is 160,000 VND (160,000 VND total useful – 0 VND you had before/1 unit change), the MU of the second fish is 120,000 VND (280,000 VND total usefulness). use – 160,000 VND you have in advance / 1 change). Same for the rest.

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Use the equation to optimize your utility. According to economic theory, consumers decide to consume based on their efforts to maximize their utility. In other words, consumers want to get the greatest possible satisfaction from the money they have. This means that they tend to buy the product or good until the marginal utility of buying more is less than the marginal cost (the price of one more unit increase). ^{[7] X Research Sources}

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Determine the loss utility. Let’s consider the example situation again. First, we have a price of 40,000 VND per fish. We then determine that the first fish has a MU of 160,000 VND, the second fish 120,000 VND, the third fish 60,000 VND and the last fish has a MU of 20,000 VND. ^{[8] X Research Sources}

With the above information, in the end you won’t actually buy the fourth fish. Its marginal utility (VND20,000) is lower than its marginal cost (VND40,000). Basically, your utility is lost with this trade, so it’s not in your favor).

Using the Marginal Utility Chart

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Make columns for quantity, total utility, and marginal utility. Most MU charts have at least these three columns. The MU chart may sometimes have additional columns, but the three columns above represent the most important information. Usually, these columns are sorted from left to right. ^{[9] X Research Source}

Note that column headings are not always correct. For example, the “Quantity” column could be represented as “Purchased Item”, “Purchased Units” or similar. It is important that the information is presented in the column.

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You may notice a decreasing trend in marginal utility. A “classic” MU chart often shows this, when a consumer buys more of a certain good, the desire to buy more of that good goes down. ^{[10] X Research Source}

In other words, at some point, the marginal utility of each additional unit purchased will begin to decrease. Ultimately, the consumer becomes less satisfied with the purchase.

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Determine Maximum Usefulness. This is the point at which marginal price exceeds MU. Marginal utility graphs make it easier to predict how much a consumer will buy. It should be recalled that consumers tend to buy until the marginal price (the cost of adding an extra unit) is greater than MU. If you know how much the commodity analyzed on the graph costs, utility peaks at the last line where MU is above marginal cost. ^{[11] X Research Source}

Note that the usefulness level does not necessarily peak when MU starts to go negative. It is possible that the goods still benefit the consumer even though they are no longer “worth it”.
MU here is not negative but it still reduces the total utility because it is not worth the cost.

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Use chart data to find additional information. Once you have the above three “key” columns, it becomes easier to find more metric information about the model situation the chart is analyzing. This is especially true when you use a spreadsheet program like Microsoft Excel, which can do the calculations for you. Here are two types of data you may want to enter in the additional column to the right of the three main columns: ^{[12] X Research Source}

Average Useful: Total usefulness in each line divided by the number of items purchased. ^{[13] X Research Source}
Consumer Surplus: Marginal utility at each line minus the marginal cost of the product. This number represents the “profit” in terms of utility consumers get from purchasing each product. It is also known as the “economic surplus”. ^{[14] X Research Source}

Advice

It is important to understand that the situations in the example are model situations. Here, they represent hypothetical consumers (rather than actual consumers). In real life, consumers are not perfectly rational; for example, they may not buy exactly as many products as they need to maximize utility. Good economic models are great tools for predicting large-scale consumer behavior, but they are often not completely “accurate” with real life. ^{[15] X Research Source}
If you add a column of consumer surplus to the graph (as mentioned above), utility will peak at the bottom line before consumer surplus becomes negative.

Steps

Using the Marginal Utility Equation

Calculate MU for Extra Units

Using the Marginal Utility Chart

Advice

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