What is Marginal Utility

The concept of marginal utility is key to understanding consumer behavior. Marginal utility generally declines with higher consumption. Savings play an important role in maintaining a stable marginal utility of money over time. Understanding marginal utility and how savings enhance it can provide useful insights on optimizing economic utility and satisfaction. This article explores the marginal utility meaning, factors affecting it, and how savings can increase the marginal utility derived from money.

What is marginal utility?
 

Marginal utility refers to the additional satisfaction or benefit a consumer gains from having additional units of a product or service. It describes how much extra utility is provided by an incremental increase in consumption. For example, the marginal utility of the fourth apple eaten is lower than that of the 1st apple.

The concept of marginal utility of money is attributed to the 19th century economist Alfred Marshall. It plays a key role in explaining consumer behavior and the value placed on different units of a commodity.

Characteristics of marginal utility
 

Marginal utility declines as more units are consumed. This is called the law of diminishing marginal utility. Marginal utility of money represents the utility gained from the last or marginal unit consumed rather than the total utility. It highlights the satisfaction from an additional unit, not the overall utility. Marginal utility helps explain consumer preference for variety rather than more of the same item due to declining marginal utility. It guides consumer spending decisions within a limited budget by comparing marginal utilities. 

Factors affecting marginal utility
 

The rate of consumption - Consuming units of a product faster leads to declining marginal utility.

Time - The marginal utility for a commodity may increase after some time gap following an initial period of high consumption.

Individual preferences - The utility gained varies across individuals based on their personal tastes and preferences.

Availability of substitutes - The presence of close substitutes for a product lowers its marginal utility for consumers.

Budget - Higher purchasing power and disposable income increases the marginal utility derived.

Marginal utility of money

Money has high marginal utility for low-income groups. Additional income makes a big positive difference to their lifestyle. For high-income groups, extra money adds relatively less utility at the margin due to diminishing returns. During financial hardship or emergency situations, the marginal utility of money rises sharply for individuals. Windfall gains like lottery winnings have lower marginal utility compared to money earned through one's efforts.

Savings increase marginal utility of money
 

Savings create a larger disposable income pool. Higher availability of money increases its marginal utility. Savings can absorb income shocks during adversities, preventing sharp falls in disposable income. This stabilizes the marginal utility of money. They enable meeting big ticket expenses like children’s education fees through lump sum payments, which have higher utility. When income falls suddenly, like job loss, savings help maintain consumption providing utility. Overall, savings make the marginal utility curve flatter and more stable over time.

How to raise marginal utility of savings?
 

• Building an emergency corpus to handle contingencies without income drops to maintain utility.
• Maintain health insurance to prevent medical spends from eroding savings
• Invest savings to earn inflation-beating returns rather than leaving the money idle
• Avoid temptation-spending from savings for short-term happiness spikes that reduce utility
• Periodically review savings and financial goals to identify any shortfall, requiring course correction
• Open a savings account that offers high interest rates and charges minimal fees to help grow your savings quickly

In conclusion
 

Marginal utility is a pivotal concept to analyze consumer demand and spending. Savings can stabilize the marginal utility derived from money over time. By opening a savings account online with IDFC FIRST Bank, one can achieve marginal utility through benefits like monthly interest credits and higher interest rates.
 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.