Marginal Utility

An economic concept that refers to the additional satisfaction or value an individual derives from consuming an additional unit of a good or service.

Author: Mohammad Kasif
Mohammad  Kasif
Mohammad Kasif
Education-Graduation Degree-Bachelor’s in Commerce Skills- Technical Skills: Canva, Figma, Ms Excel, Ms powerpoint and Ms Office Non technical skills- Negotiation, Strategy, Communication Skills Experience: Wealth Management Analyst at Wise Finserv, Consulting, Research and Writing Intern at at Unlock Consultancy
Reviewed By: Josh Pupkin
Josh Pupkin
Josh Pupkin
Private Equity | Investment Banking

Josh has extensive experience private equity, business development, and investment banking. Josh started his career working as an investment banking analyst for Barclays before transitioning to a private equity role Neuberger Berman. Currently, Josh is an Associate in the Strategic Finance Group of Accordion Partners, a management consulting firm which advises on, executes, and implements value creation initiatives and 100 day plans for Private Equity-backed companies and their financial sponsors.

Josh graduated Magna Cum Laude from the University of Maryland, College Park with a Bachelor of Science in Finance and is currently an MBA candidate at Duke University Fuqua School of Business with a concentration in Corporate Strategy.

Last Updated:January 7, 2024

What Is Marginal Utility?

Marginal utility is an economic concept that refers to the additional satisfaction or value an individual derives from consuming an additional unit of a good or service. It is the change in total utility resulting from a small change in the quantity of a good consumed.

It is a crucial concept for understanding diminishing returns and the law of demand. Marginal utility is based on the idea that the satisfaction or benefit a person derives from consuming one additional unit of a good or service diminishes as they consume more of it.

The concept is closely related to consumer behavior and decision-making. It helps explain how individuals allocate their limited resources among exclusive goods and services to maximize their overall satisfaction or utility.

To apprehend the idea, consider an instance of someone consuming slices of pizza. Initially, the first slice of pizza provides a significant level of satisfaction or utility. 

As the person continues consuming additional slices, the MU of each slice diminishes. The second slice may still be enjoyable, but the level of satisfaction is lower than that of the first slice.

The third slice brings even less satisfaction, and so on. Eventually, a point is reached where consuming more slices of pizza may even result in zero or negative additional satisfaction, leading to discomfort or a decrease in overall satisfaction.

Key Takeaways

  • Marginal Utility helps explain why consumers make certain choices and preferences in their consumption patterns. 
  • The law of diminishing MU is closely related to the downward-sloping demand curve. 
  • Understanding MU helps individuals and businesses make more rational decisions when allocating resources.
  • It allows them to evaluate the utility gained from each additional unit and make choices that maximize overall satisfaction or profit.
  • Businesses can analyze the MU consumers derive from their products to determine optimal pricing levels and develop products that increase MU to attract customers.

Implications of Marginal Utility

The concept has several important implications. 

  1. It helps explain why consumers tend to diversify their consumption across different goods. Consumers seek additional goods with a higher MU to maintain or increase their overall satisfaction.
  2. It helps explain the downward-sloping demand curve. MU decreases as the quantity of goods consumed increases, making consumers less willing to pay a higher price for additional units. This relationship between MU and price is central to the law of demand. 
  3. It also provides insights into pricing and production decisions for firms. Firms aim to maximize profits by producing several goods where the marginal cost equals the marginal utility or consumer benefit.


Firms can optimize their production levels and pricing strategies by understanding how consumers' marginal utility changes with additional units consumed.

By understanding the concept, economists and businesses can better analyze and predict consumer choices and market outcomes.

Marginal Utility: Graphical Representation and Examples

MU is the additional satisfaction or happiness a consumer will get from consuming an additional unit of a good or service.

The image above shows a graphical representation of marginal and total utility. Where a red colored line depicts MU, and a blue colored line depicts TU. The downward-sloping red line shows that with an increase in quantity, MU decreases (not necessarily at a constant rate).

MU can be found by taking the derivative of the total utility function or by using the formula below:

Marginal Utility = Change in total utility / Change in Quantity of Commodity consumed

Example 1

Consider a linear utility function U(x) = ax, where 'a' is a constant representing the individual's preference, and the person consumes ’x’ units of a single good. 

The utility gained from consuming different units of the good, assuming a = 4, is as follows:

  • U(1) = 4
  • U(2) = 8
  • U(3) = 12
  • U(4) = 16
  • U(5) = 20

The marginal utility of each additional unit can be calculated by taking the difference between consecutive utility levels:

  • MU of the 2nd unit: U(2) - U(1) = 8 - 4 = 4
  • MU of the 3rd unit: U(3) - U(2) = 12 - 8 = 4
  • MU of the 4th unit: U(4) - U(3) = 16 - 12 = 4
  • MU of the 5th unit: U(5) - U(4) = 20 - 16 = 4

In this linear utility function, the MU is constant and equal to 4.

Example 2

Let the utility function be U(x) = 2 + 3x^2, where 'x' represents the number of ice cream cups consumed.

Here's a table of your total utility for different quantities of ice cream cups:

Ice-cream Cup's Total Utility
Quantity (x) Total Utility (U(x))
1 5
2 14
3 29
4 50
5 77

For calculating the marginal utility when you increase your consumption from 2 to 4 ice cream cups:

1. Calculate the change in total utility:

Change in Total Utility = U(4) - U(2) = 50 - 14 = 36

2. Calculate the change in the quantity of commodity consumed:

Change in Quantity = 4 - 2 = 2

3. Calculate the marginal utility using the formula:

Marginal Utility = Change in Total Utility / Change in Quantity = 36 / 2 = 18

In this example, the marginal utility of increasing your ice cream consumption from 2 to 4 cups is 18.

Types of Marginal Utility

There are several types of marginal utility that economists often discuss:

  1. Positive Marginal Utility: Positive Marginal Utility occurs when each additional unit of a good or service increases the overall satisfaction or utility of the consumer.
  2. Zero Marginal Utility: Zero marginal utility occurs when consuming an additional unit of a good does not change the overall satisfaction or utility of the consumer.
  3. Negative Marginal Utility: Negative marginal utility happens when each additional unit of a good brings less satisfaction than the previous unit.
  4. Increasing Marginal Utility: As consumption increases, the marginal utility can rise, leading to heightened satisfaction from each additional unit consumed. This might occur with rare or novel experiences, creating exceptions to the typical diminishing trend.
  5. Constant Marginal Utility: Consistent marginal utility implies that the satisfaction gained from each additional unit consumed remains relatively steady, simplifying economic analysis. However, real-world consumption often experiences diminishing satisfaction due to varied preferences.
  6. Diminishing Marginal Utility: The Law of Diminishing marginal utility states that when you consume more of a good or service, you will not get the same utility as before. When you consume more and more, the total utility will increase but at a decreasing rate.

Let us take a look at an example:

Sandrine spends her entire income on Krispy Kreme Donuts and Chicken at Wendy's. She consumes 1 donut and 1 meal of chicken for each diner. However, she decided to consume an additional donut and an additional meal of chicken to satisfy her satiety.

The table below shows her total utility for Sandrine:

Sanderine's Total Utility
Number Of Goods Donut At Krispy Kreme (Utility) Chicken Meal At Wendy's (Utility)
0 0
1 20 10
2 30 20

The table shows that the utility derived from consuming donuts (from 0 to 1) is 20 utils, and the utility derived from consuming the additional unit of donuts (from 1 to 2) is only 10 utils.

Upon looking, we can see that there is a diminishing Marginal utility for consuming donuts.

Also, the utility derived from consuming chicken meal (from 0 to 1) is 10 utils, and the utility derived from consuming the additional unit of chicken meal (from 1 to 2) is also 10 utils indicating constant MU.

Utility-Maximizing Rule

So, from the above, we can conclude that consumers have one objective, i.e., to maximize their utilities, given the budget constraint. We should have the maximum utility from our limited resources (here, the resource is income).

As a recapitulation, the utility is represented by the Indifference Curve. The Slope of the Indifference Curve is the MRS (marginal rate of substitution).  The MRS shows the willingness of consumers to give up one product to buy another while maintaining the same level of utility.

The limited resource in Consumer Theory is income which can be represented mathematically by an equation called Budget Constraint. The Slope of Budget constraint is the ratio of Prices.

So to Maximize the utility: 

  1. You must spend your entire income.
  2. Buy the combinations of goods where the Marginal rate of substitution is equal to the price ratio.

Utility Maximizing Rule: Slope of Budget Constraint = Slope of Indifference curve 

Px / Py = MUx / MUy

Another Approach: 

MUx / Px = MUy / Py


  • MUx = the marginal utility from consuming unit X
  • Px = the price of good x
  • MUy = the marginal utility from consuming unity
  • Py = the price of commodity y

Let us take a numerical example for Maximizing Utility:

Elizabeth buys Books and Clothes to maximize her utility. She works at Nestle Toll House Coffee, earning an income of 500$. The Price of the book is 40$, and the clothes are 20$.

Her additional utility gained from x is 2, and from y is 4.

  1. Write an Equation for Elizabeth's Budget Constraint.
  2. How much will Elizabeth buy clothes if she spends her entire income on them?
  3. Calculate the slope of the Budget Constraint.
  4. Is Elizabeth maximizing her utility?

For the solution 

1. Write an Equation for Elizabeth's Budget Constraint.

Budget Constraints take the following form: 

Px * X + Py * Y = I

Let Book be X and Clothes be Y

40X + 20Y = 500

2. How many clothes will Elizabeth buy if she spends her entire income on them?

Income/clothes = 500/20 = 25

So she will buy 25 clothes if she spends her entire income.

3. Calculate the slope of the Budget Constraint.

The slope of Budget Constraint is the ratio of prices: 

Px/Py = 40/20 = 2

4. Is Elizabeth maximizing her utility?

Using Utility Maximizing Rule 

Utility Maximizing Rule: MUx/px = MUy/py

The above formula gives 2/40 = 4/20, which is not true.

Another way to determine if Elizabeth is maximizing her utility is to compare the marginal rate of substitution (MRS) with the price ratio (Px/Py). The MRS is given by the ratio of the marginal utilities:

MRS = Mux / Muy = 2 / 4 = 0.5

Comparing the MRS with the price ratio:

MRS (0.5) is not equal to Px / Py (2)

Since the MRS does not equal the price ratio, Elizabeth is not maximizing her utility.


MU refers to the additional satisfaction or value a person derives from consuming or acquiring an additional unit of a good or service. 

The deduction drawn from the idea of marginal utility is that individuals allocate their resources to maximize their overall satisfaction or utility. 

Rational individuals will continue to consume additional units of good as long as the marginal utility derived from the last unit consumed is greater than or equal to the marginal cost of obtaining it. 

However, as the individual consumes more and more units, the marginal utility starts to diminish, eventually reaching zero or even becoming negative.

This understanding has important implications for various economic phenomena. It helps explain why individuals tend to purchase more of a good when its price decreases, as the lower price increases the marginal utility per unit. 

Furthermore, the concept provides the basis for understanding the demand curve in economics. It represents the relationship between the price of a good and the quantity demanded, and it slopes downward because of the diminishing marginal utility. 

The concept also provides valuable insights into individual decision-making and helps explain various economic phenomena.

By understanding how individuals allocate their resources based on the diminishing marginal utility, economists can analyze consumer behavior, market demand, and the overall efficiency of resource allocation in an economy.

Marginal Utility FAQs

Valuation Modeling Course

Everything You Need To Master Valuation Modeling

To Help You Thrive in the Most Prestigious Jobs on Wall Street.

Learn More

Researched and authored by Mohammad Kasif | LinkedIn

Reviewed and edited by Parul GuptaLinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: