The concept of marginal utility refers to the additional satisfaction or utility that an individual derives from consuming one more unit of a particular good or service. In other words, it represents the incremental value that an individual attaches to an additional unit of a good or service.
For example, consider a situation where an individual has a fixed amount of money to spend on a particular good, such as a bag of chips. The first bag of chips may provide a high level of satisfaction to the individual, as they are hungry and craving chips. However, as the individual continues to consume additional bags of chips, the marginal utility of each additional bag will likely decrease. This is because the individual's hunger will eventually be satisfied, and the additional bags of chips will provide less and less satisfaction.
The concept of marginal utility is important in economics because it helps to explain the law of diminishing marginal returns, which states that as the quantity of a good or service consumed increases, the marginal utility derived from each additional unit will eventually decline. This can be seen in the example above, where the first bag of chips provides a high level of satisfaction, but each additional bag provides less and less satisfaction.
The concept of marginal utility is also important in the field of pricing, as it helps to explain how the price of a good or service is determined. In general, the price of a good or service is determined by the marginal utility that an individual derives from consuming it. For example, if the marginal utility of a particular good is high, the individual is willing to pay a higher price for it. On the other hand, if the marginal utility of a good is low, the individual is not willing to pay as much for it.
In conclusion, the concept of marginal utility refers to the additional satisfaction or utility that an individual derives from consuming one more unit of a particular good or service. It is an important concept in economics and pricing, as it helps to explain how the price of a good or service is determined and how the law of diminishing marginal returns operates.