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Study notes

Marginal Utility Analysis

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

Utility is a measure of the satisfaction that we get from purchasing and consuming a good or service

Marginal Utility Analysis - revision video
  • Total utility: The total satisfaction from a given level of consumption
  • Marginal utility: The change in satisfaction from consuming an extra unit

Standard economic theory believes in the idea of diminishing returns i.e. the marginal utility of extra units declines as more is consumed

Marginal utility and willingness to pay

Marginal utility is the change in total satisfaction from consuming an extra unit of a good or service

  • Beyond a certain point, marginal utility may start to fall (diminish)
  • In our example, this happens with the 4th unit where MU falls to 12
  • The 8th unit carries zero marginal utility i.e. total utility stays the same
  • If marginal utility is falling, then consumers will only be prepared to pay a lower price
  • This helps to explain the downward sloping demand curve

Quantity Consumed

Total Utility (TU)

Marginal Utility (MU)

1

10

10

2

24

14

3

40

16

4

52

12

5

61

9

6

68

7

7

72

4

8

72

0

Marginal utility and the demand curve for a product

A fall in marginal utility means that the consumer is getting less extra satisfaction from each subsequent unit consumed. We can infer from this that a rational consumer will not be willing to pay as much money for later units and therefore their willingness to pay will drop. This is one reason why a conventional demand curve for a normal good has an inverse relationship between price charged and quantity demanded.

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