Marginal Utility Analysis

What is Utility - The quality of the goods or product, which satisfies human
wants or need, is called utility. For example if a person is thirsty and he drinks
water to quench his thirst. It means that the water has the quality to satisfy
humans thirst. This quality of water is called utility.
What is Marginal Utility - Person uses many units of the good to satisfy his
need. As the consumption of the unit increases, utility obtained from each unit
decreases. The last unit, which satisfies human want, is the marginal unit and
utility gained from this unit is called marginal utility.
It can be defined as the change in the total utility resulting from a one- unit
change in the consumption of a commodity per-unit of time. According to
Marshall-The additional benefit which a person derives from a given increase
of his stock of a thing diminishes with every increase in stock that he already
has.
Marginal utility has also been defined as the additional attained to the total
utility by the consumption of the last unit or we can say that the change in the
total utility resulting from the change in the quantity of the commodity
consumed is called marginal utility.
Marginal utility = Change in total utility / Change in quantity consumed
What is Total utility- Utility gained from all the units of the commodity is called
total utility.
Suppose if a person is using 5 units of the commodity to satisfy his need then
whatever he gains the total satisfaction from all 5 units of the good, is called
total utility.
Units of the commodity
1
2
3
4
5
6
7

Marginal utility
10
8
6
4
2
0
-2

Total utility
10
18
24
28
30
30
28

Lets explain this. When a consumer goes on taking the units of good, he meets
with the less and less utility of each successive unit. When his want completely
satisfies, he gets zero utility and even if he continues taking the additional unit,
it turns in negative.
The total utility goes on increasing but at the diminishing rate. It will be
maximum when the marginal utility is zero. It starts decreasing when marginal
utility is negative.

Basic Assumptions of Marginal Utility Analysis

1. Cardinal Measurement of Utility- Utility is a quantifiable entity that can be
measured by assigning definite numbers such as 1, 2, 3 etc. It means that a
person can express the satisfaction derived from the consumption of a
commodity in quantitative terms.
2. Utilities are Independent- Marginal utility analysis assumes that the utilities
of different commodities are independent. It depends on the quantity
consumed of one good and not of another.
3. Constant marginal utility of money- Marginal utility of money remains
unchanged. This assumption becomes necessary as the marginal utility of a
commodity is measured in terms of money.
4. Introspection- It is assumed that mind of the men work identically in similar
situations and from ones own experience. It is possible to draw inference
about another person.
Limitations of the Law1. Commodity should be taken in suitable unit- The initial quantity should be
sufficient for the application of the law.
2. For the application of the law- It is assumed that commodity is taken within
a certain time.
3. Consumers taste, interest, and income should not be changed at a time
period.
4. It is assumed that person should be rational in behaviour.
5. This law does not apply in the case of the rare collections. As in this case if a
person is collecting ancient coins, the more he is able to collect, the more he
will get satisfaction.
6. This law does not apply to money as the more money we will have, more we
will get satisfaction.

Thus the law of marginal utility is a statement of a tendency which applies

sooner or later.