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Marginal usefulness refers to the concept of measuring the incremental value or benefit gained from a particular activity or decision. It is rooted in the economic theory of diminishing marginal utility, which suggests that as we consume or use more of a good or service, the additional satisfaction or benefit derived from each unit gradually decreases. Understanding ways to evaluate and optimize marginal usefulness is essential for individuals, businesses, and policymakers to make informed choices and allocate resources effectively. This introduction will explore various approaches and strategies that can be employed to enhance marginal usefulness, ultimately leading to more efficient decision-making and resource allocation.
This article was co-written by Michael R. Lewis. Michael R. Lewis is a retired Texas executive, entrepreneur and investment advisor. He has over 40 years of experience in Business & Finance, including the position of Vice President of Blue Cross Blue Shield of Texas. He holds a BBA in Industrial Management from the University of Texas at Austin.
There are 7 references cited in this article that you can view at the bottom of the page.
This article has been viewed 62,503 times.
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.
Steps
Using the Marginal Utility Equation
- 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.
- 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.
- Suppose that in the example situation in Step 2, you decide that you are hungry enough to eat all four fish. After using the second fish, you are relatively full and only pay 60,000 VND for the next fish. After using the third child, you are almost completely full, and therefore you pay only 20,000 VND for the last one.
- The satisfaction from consuming fish is almost eliminated by the uncomfortable feeling of fullness. You could say that four fish gives a total utility of 160,000 VND + 120,000 VND + 60,000 VND + 20,000 VND = 360,000 VND.
- VND 360,000 – VND 280,000 (example in Step 2) = VND 80,000
- 4 (fish) – 2 (fish) = 2
- 80,000 VND/2 = 40,000 VND
- This means that, for you, between the second and fourth fish, each additional fish yields the equivalent of 40,000 dong in utility. This is the average value; actually, the third fish is equivalent to 60,000 VND and of course, the last fish is equivalent to 20,000 VND.
Calculate MU for Extra Units
- 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.
- 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
- 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.
- 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.
- 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.
- 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.
This article was co-written by Michael R. Lewis. Michael R. Lewis is a retired Texas executive, entrepreneur and investment advisor. He has over 40 years of experience in Business & Finance, including the position of Vice President of Blue Cross Blue Shield of Texas. He holds a BBA in Industrial Management from the University of Texas at Austin.
There are 7 references cited in this article that you can see at the bottom of the page.
This article has been viewed 62,503 times.
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.
In conclusion, understanding and implementing ways to marginal usefulness can greatly benefit individuals and organizations. By recognizing that not all resources and activities have equal levels of productivity, we can allocate them efficiently and prioritize those that bring the highest returns. Through measuring and evaluating marginal usefulness, we can make informed decisions and avoid wasting valuable time, energy, and resources on low-yield endeavors. Additionally, continuously reassessing and adapting our strategies and approaches based on changing circumstances and new information can further enhance our overall productivity and success. Utilizing ways to marginal usefulness empowers us to make smart choices, optimize our efforts, and ultimately achieve our goals more effectively.
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