What is Marginal Utility? - Definition, Theory, Formula & Example Video

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  • 0:00 Utility Of Pizza
  • 0:33 Theory And Definition
  • 1:40 Marginal Utility Formula
  • 3:11 Another Pizza Example
  • 4:24 How To Use Marginal Utility
  • 4:50 Lesson Summary
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Lesson Transcript
Instructor: Toni Bonton

Toni has taught personal finance and is currently pursuing a doctorate in business administration.

Utility is an essential economic concept that explains the satisfaction in consumption. This lesson explains marginal utility, how it is calculated, and its usefulness. Then you'll be able to test your newfound knowledge with a quiz.

Utility of Pizza

David really loves pizza. Each time David eats a slice of pizza, he feels a certain amount of satisfaction. The second slice of pizza brings more satisfaction than the first, and the third slice is more satisfying than the second. However, by the time David eats the last slice of pizza, the amount of satisfaction is much less than the first few slices. The satisfaction that David feels after each slice, no matter how much, is called the utility.

Theory and Definition

The theory behind utility is simple. A certain amount of satisfaction, value, or benefit is gained when a good or service is consumed. As David consumes each slice of pizza, he experiences satisfaction. Similarly, an employee working on a project can feel a certain amount of value is added to the project based on the number of hours spent working on the project. An athlete assigns a certain amount of benefit to the amount of time spent training. The total amount of satisfaction, value, or benefit gained from the consumption of each good or service is the total utility. Let's look back at David and his pizza.

As the excitement of eating pizza increases, the total utility from the consumption of one slice of pizza rises from 7 to a total utility of 12 by the consumption of the third slice. However, the total utility decreases to 5 by the time the fifth slice of pizza is consumed, as David starts to feel full. The variance in total utility as each slice of pizza is consumed is called the marginal utility.

Marginal Utility Formula

Marginal Utility = Change in total utility / Change in number of units consumed

The first component of the formula is to calculate the change in total utility. This is done by subtracting the total utility of the current consumption and a previous consumption. To find the change in total utility between the second and first slices, subtract the total utility of the current slice (the second slice of pizza has a total utility of 10) and a previous slice (the first slice of pizza has a total utility of 7). The result is a total utility of 3 (10 TU - 7 TU = 3TU). The change in utility between the fifth and the third slice of pizza actually yields a negative amount of total utility (5 TU - 12 TU = -7 TU).

The second component of the marginal utility formula is the change in the number of units that have been consumed. This is done by subtracting the number that is currently being consumed from a previously consumed amount. The change in units consumed from the fourth and third slice of pizza is 1 (4 - 3 = 1). The change in units consumed from the fifth and third slice of pizza is 2 (5 - 3 = 2). Once these components are calculated, the marginal utility is then calculated by dividing the change in total utility by the change in number of units consumed. Let's give it a try!

Another Pizza Example

Let's take another look and David and his pizza.

David just finished his first slice of pizza and is already tackling another slice. The second slice is even better than the first slice. Calculate the marginal utility between the second and first slice of pizza.

Marginal Utility = (10 TU - 7 TU) / (2 slices of pizza - 1 slice of pizza)

Marginal Utility = 3 TU / 1 slice of pizza

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