Utility & Marginal Utility

Utility represents the well-being, welfare, or happiness of consumers and households. Consumers aim to maximize their utility within constraints such as income limitations and the prices of desired goods. For instance, a consumer earning $5,000 monthly cannot sustainably spend $10,000 per month. The affordability of goods depends not only on income but also on how far that income stretches in relation to product prices.

A table illustrates the total utility derived from consuming varying numbers of pizza slices. If no pizza is consumed, there’s zero utility; however, one slice provides 20 units of happiness or 'utils.' With each additional slice—two providing 36 utils and three offering 46—the consumer's overall satisfaction increases incrementally. The concept emphasizes that total utility represents cumulative well-being gained from all consumed slices rather than per-slice enjoyment.

Utility is ordinal, meaning higher numbers indicate greater utility but do not quantify how much better one value is compared to another. For example, a utility of 36 surpasses 20 in preference but cannot be interpreted as being twice as good. This concept emphasizes ranking preferences without assigning proportional significance between values.

Marginal utility measures the change in satisfaction a consumer experiences when consuming an additional unit of a good. For example, moving from zero to one slice of pizza increases utility by 20 units, but subsequent slices yield diminishing returns: 16 for the second slice, then 10, six, two—and eventually negative three at the sixth slice as overconsumption leads to discomfort. While marginal utility can become negative for specific goods due to factors like sickness or satiation, consumers generally desire more of some goods overall. Even if they no longer want more pizza after five slices, they might allocate resources toward other items such as beverages or entertainment.

Diminishing marginal utility occurs when the additional satisfaction (marginal utility) gained from consuming more of a good decreases as consumption increases. In some cases, marginal utility might initially rise before declining. Importantly, diminishing marginal utility does not mean total utility is decreasing; total satisfaction can still grow until the point where marginal utility turns negative.

The total utility curve illustrates how satisfaction changes with consumption. Initially, as more slices are consumed, the curve rises steeply but flattens over time until it eventually declines when additional consumption reduces overall satisfaction. Marginal utility represents the slope of this curve—showing how much extra benefit is gained from consuming one more unit—and diminishes as quantity increases. When marginal utility turns negative, further consumption decreases total happiness.