Marginal Utility

Utility is in the eye of the beholder. One person might see high utility in some delicious slices of pineapple pizza, while another person only sees negative utility--because they believe pineapple and pizza together are tantamount to blasphemy.

Same goes with a nice car, which has not only transport utility, but social utility. One person might decide they'll gain some
much-needed social points with snazzy wheels, while another person might be afraid they'd be, uh, viewed as a tool. A convertible might offer high utility year-round for someone living in southern California, and low utility for someone living in New York.

High quality socks for Christmas? High utility, if that’s just what you needed--maybe you can’t get enough wooly socks, or you collect socks with cool patterns. Low utility if you’re a 10-year old boy who was expecting something a little more entertaining.

How much utility something can give someone depends on that person’s needs and preferences. Utility even has its own standard measurement: “utils”.

Getting into the nitty-gritty of utility, we have marginal utility and total utility. Marginal utility is the utils a consumer gains from consuming one more unit of a good or service. Those marginal utils added up is total utility: i.e. the total amount of utility gained from a good or service.

Let's take popcorn, for instance. Salty, buttery, movie theater popcorn. You can't resist its buttery deliciousness. Plus you don't go to the movies that often--you deserve this popcorn. In general, we decide to buy something when the marginal utility of a good or service is greater than the marginal cost of it. In this case, you're willing to pay that five bucks for the popcorn, because it's sooooo worth it.

The first bite of popcorn is the most delicious--a high marginal utility. It gets your taste buds watering and ready for more. The second bite is great, too--as is the third and forth. Lots of utils.

Eventually though--you...don't feel so good. You just consumed more fake butter than you'd wish on your worst enemy. All of a sudden, you stop eating the buttery deliciousness. It’s not worth a full-blown stomachache for the rest of the night. As you can see, your demand for popcorn, like your demand curve for most things, is downward-sloping.

When marginal cost is greater than marginal utility, we stop consuming additional marginal units of a good. Or at least we should. In this case, the marginal cost of eating one more handful of popcorn (plus the money you already paid for it) just isn't worth the marginal benefit you’d get out of the next handful, since it'll just make you feel worse overall.

If you’re the kind of person who does keep eating it even though you’re not enjoying it anymore, because you paid for it...that’s falling for the sunk cost fallacy. Uh yeah. Don’t do that. It doesn’t make sense to pay for negative marginal utility. Just take your net positive utility and walk away, slowly.

This downward spiral of marginal utility--starting out high with the first unit of consumption and finishing low with the last unit of consumption--is called the law of diminishing marginal returns. As we consume more and more of a good or service, our marginal utility from each additional unit consumed gets less and less. Each bite is less enjoyable than the last.

While some goods and services we consume are subject to diminishing marginal utility--like food--others can have constant or increasing marginal utility. For instance, when people first became addicted to a social media platform, it’s likely their marginal utility was increasing, which is why they started using it more, and became hooked.

This is why we care about marginal utility: it often changes as we consume more and more of a certain good or service. If you want to know how and why people consume a specific good or service the way they do, take a look at their marginal utility.

When we want to take a step back and look at the big picture of a good or service… yeah, that’s where total utility comes in. If you want to compare goods and services against each other, you can compare their total utilities.

For instance, don't regret that bucket of popcorn--your total utility from popcorn consumption was decidedly worth the cost. Each bit of marginal utility from each bite added to the total utility of the entire popcorn experience. If anything, regret that one kernel you still have stuck in your back teeth. With any luck, it’ll come out by Tuesday.