What is marginal utility in economics?

Marginal utility refers to the degree of satisfaction increased per unit consumption of a certain item. Marginal means increment, which means that the increase of independent variables leads to the increase of dependent variables. In marginal utility, the independent variable is the consumption of an article, and the dependent variable is satisfaction or utility. The utility change caused by consumption change is marginal utility.

The magnitude of marginal utility is directly proportional to the strength of desire and inversely proportional to the quantity of commodity consumption. Marginal utility can be zero or even negative in practice, but it will not be zero or negative in theoretical analysis.

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Marginal utility theory can also explain the famous "value paradox" in economics. The paradox of value, also known as the mystery of value, means that some things have great utility, but the price is very low, and some things have little utility, but the price is very high. This phenomenon is inconsistent with the traditional price theory. This value paradox was put forward by Adam Smith more than 200 years ago, and the satisfactory answer was not given until the marginal utility theory was put forward. The key to explain this problem is to distinguish between total utility and marginal utility.

The total utility of water is enormous. We can't live without water. But the more we spend on something, the smaller the marginal utility of its last unit. We use a lot of water, so the marginal utility of the last unit of water can be ignored. On the contrary, compared with water, the total utility of diamonds is not great, but because we buy few diamonds, its marginal utility is great.

According to the marginal utility theory, the way consumers distribute income is to make the marginal utility of every dollar expenditure of all commodities equal. People also distribute their income to water and diamonds according to this principle: the marginal utility of diamonds is high and that of water is low. Only when the high price of diamond is divided by its high marginal utility and the low price of water is divided by its low marginal utility can the marginal utility of every dollar spent on diamond and water be equal.

So it is reasonable that the price of diamonds is high and the price of water is low. In other words, people are willing to pay high prices for diamonds with high marginal utility, and it is a rational behavior to pay low prices for water with low marginal utility. The truth of "things are rare" lies in the high marginal utility of "rare" goods.

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