Marginal Utility
Candlefocus EditorMarginal utility is often cited to explain consumer behavior and can also be used to determine how much of an item consumers are willing to purchase. Marginal utility is one of the key understandings in the economic rational choice theory.
The law of diminishing marginal utility states that with each additional unit consumed, the utility derived from the given product will reduce over time. In order to explain how this works, imagine that a consumer is eating a cake. The first few bites of the cake will give considerable pleasure, while every additional bite might bring only a small amount of pleasure. This concept helps to explain why a person only eats so many pieces of cake however, still has an appetite for a different kind of snack — like ice-cream.
Marginal utility can be negative, zero or positive. A negative marginal utility indicates that an additional unit of the good or service will be disliked so much, that the satisfaction derived from it will be lower than the satisfaction derived from the original unit. On the other hand, a positive marginal utility suggests that the addition of one unit will increase the overall satisfaction derived.
In terms of taxes, the law of diminishing marginal utility is often used to argue for progressive taxation. This is because it suggests that people with more disposable income will derive less and less marginal utility from additional income, whereas those at the lower end of the economic spectrum might derived greater utility from the same amount of taxable income.
In conclusion, marginal utility is an important concept in economics which can be used to explain and determine consumer behavior. It helps explain why someone might consume more of one item than another, and can help justify the use of progressive taxes.