How to Calculate Diminishing Marginal Utility

Diminishing Marignal Utility is an economic theory

Diminishing marginal utility is a term used in the field of economics. Utility is the idea of quantifying satisfaction. The unit that is used is called a util. The thought behind diminishing marginal utility is that the level of satisfaction of consuming a good decreases as each additional unit of the good is consumed. As a result, people consume a variety of goods and services rather than just one. Marginal utility is a concept that can be calculated, and through its calculation one can understand the concept of diminishing marginal utility.

Things You'll Need

• Pen/ pencil
• Paper
• Graph Paper (optional)
• Calculator (optional)

Instructions

Calculate Marginal Utility

1. Collect marginal utility data. To do this, set up a table. One column for consumption level of a good, one column for the utility at each level of consumption and one column for marginal utility. Go to amosweb.com and search marginal utility. They have a rollercoaster experiment as an example. Use their figures if you don't have your own. Another table with data you can use will be found at investipedia.com. Their example is with chocoloate. Search, "Utility" to find it.

2. Input data to the formula to calculate the marginal utility at each level of consumption. The marginal utility formula is the change in utility divided by the change in level of consumption. If you use the roller coaster example, the change in consumption level is always one because you can only take one ride at a time.

   Fill in the marginal utility column by using the formula. You will see that the marginal utility decreases as the level of consumption increases; this is diminishing marginal utility. Think in laymen's terms. The more a person rides a roller coaster the more sick, bored, dissatisfied they are likely to be. For most people, one ride per coaster is plenty.

3. Graph your results. Make the horizontal axis of your graph the consumption level, and the vertical axis your utility level. You will see when you connect the dots that they form a curve. This is the curve of marginal utility. The slope (rise over run) of this curve represents the change in marginal utility. This also represents diminishing marginal utility, as the curve will show a negative slope.

Tips & Warnings

• Utility is a rather abstract concept in economics. The calculation of it can be rather complex and is reserved for upper level courses. For basic understanding of the Diminishing Marginal Utility theory the changing level of utility is provided.

References

• Business Dictionary: Law of Diminishing Marginal Utility
• Amos Web: Marginal Utility

Resources

• Investopedia: Economic Basics: Utility