 # What is Marginal Utility?

The marginal utility represents the increase in utility for a consumer when he asks for one more unit of a product. For example, the first cold drink on a hot summer’s day is very beneficial. With each additional glass, the benefit continues to decrease. To determine the marginal utility, the first derivative of the utility function is formed. In connection with marginal utility, Gossen’s laws must be observed.

Marginal utility

This lesson covers marginal utility. You will find out what the significance of marginal utility is and how it is determined. We explain to you how the marginal utility is separated from marginal revenue and marginal costs. Finally, you will learn about Gossen’s first and second law. To deepen your knowledge, you can answer a few exercise questions after the text.

English: marginal utility

## What is the significance of the marginal utility?

In economics, research is being conducted into how the needs of private households can be satisfied as comprehensively as possible with scarce resources. For this reason, microeconomics developed household theory.

Relevant concepts in household theory are:

• To use
• Marginal utility

The benefit is used to measure the extent to which the needs of the individual and an entire economy are satisfied. It is assumed that more consumption leads to more satisfaction of needs.

Example

A child wants to have an ice cream on a hot summer day. Because it is pleasant against the warmth, the child consumes a second and a third ice cream. Economically, the child satisfies a need with each additional ice cream and thus has a greater benefit.

For the marginal utility, the change in utility depending on the consumption of another unit is relevant.

If the child does not consume ice cream, it is of no use. With the first ice cream, the benefit increases marginally. The second ice cream is even more useful. The economy describes the increase in utility that results from consuming another egg as marginal utility. The decrease in marginal utility (only one is consumed instead of two) is referred to as utility reduction.

## How is marginal utility determined? (Formula)

According to nonprofitdictionary.com, the marginal utility is determined from the 1st derivation of the utility function.

Example:

• U is the marginal utility
• X is the amount of the first good, e.g. B. a liter of water
• Y is the amount of the second good, e.g. B. one kilogram of potatoes

The difference between the two results is the marginal utility of 1. ## Delimitation of marginal revenue and marginal costs

In contrast to marginal utility , marginal revenue and marginal costs do not play a role in private households. They are used in the internal cost accounting of a company.

### The marginal proceeds

An entrepreneur determines the marginal revenue when he sells one more unit of quantity of a product.

### The marginal cost

The marginal costs form the basis for a company to be able to determine the optimal production quantity. The costs arise when the company only makes one more unit of a product. Marginal costs are determined with the 1st derivation of the cost function.

## The Gossen Laws

Hermann Heinrich Gossen (1810-1858) was a German economist who put forward two theories regarding marginal utility, known as Gossen’s first and second law.

### Gossen’s first law

Gossen’s first law is also known as the law of diminishing marginal utility or the law of saturation. Gossen’s theory here is that four glasses of water are less useful than the first or second glass. The consumer’s utility decreases with increasing consumption.

### The second Gossen law

The second Gossen law assumes an optimal private household. According to Gossen, the ratio of the marginal utility of two goods should be identical to the price ratio of these goods. Economically, this is referred to as the marginal rate of substitution.