Theory of Marginal Utility!

One of the very first chapters which caught my attention when I was in secondary 4 is this chapter, marginal utility theory. In economics, utility simply means satisfaction. Higher utility means higher satisfaction and vice versa. Then the term marginal utility refers to the additional satisfaction gained when a product or service is consumed / used / bought.

Theory of Diminishing Marginal Utility

Yes, study of economics deals with a lot of statistics. So we will be seeing plenty of tables, charts, and graphs. As you can examine from the table, the satisfaction gained from eating an additional burger
[ *YumYum*LovesBurgers* ] will result in a lower satisfaction compared to the burger previously. The theory ( and common sense ) suggests that the more you eat, the less satisfaction you will gain at a margin until there is a point where it becomes negative satisfaction ( eating more will make you uncomfortable etc. ). So if we draw a graph on this table, we will see something like this :

As you can see the downward sloping curve of marginal utility, economist then modelled the demand curve based on marginal utility curve. Thus the marginal utility curve is actually also the demand curve! This too explains why as price increases, quantity demanded of an item decreases. If consumers believe that the additional price they are paying is not equal to the additional satisfaction that they will receive, then they will obviously not pay for an extra of it!

The Paradox of Value
- Diamonds vs Water
Ever wondered why water, despite its necessity, is not seen as a precious thing? Diamonds, on the other hand, are highly priced even when it has very little in terms of use. The concept of marginal utility helps to explain this. Water is abundant, while diamonds are relatively scarce. Hence owning an extra diamond will give you higher satisfaction than getting an extra cup of water ( provided you are not in a dessert of course ) because one diamond is extremely valuable no matter how many you have while water becomes less valuable as quantity increases. This shows that marginal utility is the key factor to an item's price rather than its value in use.

Soda vs Newspapers Vending Machines
In western countries ( sadly not in Malaysia yet ), newspapers are sold in vending machines. When the consumers pay for the price of one newspaper, the lid opens up for them to take their morning paper. Unlike the soda machines which only dispense one-for-one, consumers can take as many newspapers as they want from the paper machine. Why wouldn't the newspaper companies worried about that? The concept of marginal utility can be used in this case. Newspaper unlike sodas, has very short shelf life. It just becomes useless overnight but sodas can be kept for years! Therefore, sodas have high marginal utility since you can drink it whenever it will yield the highest satisfaction. Newspapers have low marginal utility as it cannot be kept and reselling it is just not worth the time as there is abundant of supply if everyone does so. Newspaper companies therefore rely on the trust that consumers will only take as much as they need.