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Marginal utility
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Marginal utility

In economics, marginal utility is the additional utility (satisfaction or benefit) that a consumer derives from an additional unit of a commodity or service. The concept grew out of attempts by 19th-century economists to explain the fundamental economic reality of price. It was a term coined by the Austrian economist Friedrich von Wieser.

Diminishing marginal utility implies that marginal utility from one additional unit is inversely related to the number of units already owned. For example, the marginal utility of one slice of bread offered to a family that has five slices will be great, since the family will be less hungry and the difference between five and six is proportionally significant. An extra slice offered to a family that has 30 slices will have less marginal utility to the family, since the difference between 30 and 31 is proportionally smaller and the family's appetite may be satisfied by what it already has. Note that this example assumes that nothing else has changed. If the family that starts with only five slices also has much more cake than the family with 30 slices, then diminishing marginal utility need not apply. Also, if tastes or preferences vary between families or over time, this kind of differences in marginal utility need not apply. (Note also that this example assumes that each family has a unified utility function, rather than being a collection of indivdiuals each with his or her own preferences.)

As a result of diminishing marginal utility, rather than having a lot of one good or a lot of another one, one prefers having some of both. In the case of perfect substitutes this result does not apply (since the two products are essentially the same), in the case of perfect complements it applies most.

Diminishing marginal utility is a very common assumption in economics, but it is not universally assumed. It corresponds to convexity of the indifference curves.

See also