A:

Strictly speaking, businesses do not experience marginal utility like individuals do. Companies are made up of people, and each of those individual people has his or her own sense of subjective utility. Even if Company XYZ is a sole proprietorship, marginal utility would apply to the owner of the business and not XYZ itself. This doesn't prevent businesses from trying to capitalize on the concept of marginal utility, though.

The Concept of Marginal Utility

Marginal utility is the subjective satisfaction gained from the consumption of one additional unit of a good or service. Marginal utility helps answer questions such as "How much would I enjoy one more cookie?" or "Should I buy two wine glasses or three?"

Marginal utility is downward-sloping by nature; when a consumer gains a resource, he or she uses it to satisfy his or her most urgent need possible with that good. Any successive good would be used to satisfy a less urgent need. To understand how this works, consider a man with 2 gallons of water: if his most urgent need is thirst, he drinks the first gallon. He may then use the second gallon to satisfy a less valuable end, such as bathing, watering plants or making ice. This principle is known as the law of diminishing marginal utility.

Marginal Utility for Businesses

Businesses are only legal arrangements between individuals. Even though they are taxed like individuals and can be sued like individuals, no business can actually have subjective values. For this reason, they cannot have a marginal utility.

What businesses do have, however, are customers. By studying its customers' buying patterns, a business might be able to arrive at rough approximations for the average effects of marginal utility as it relates to the business's products and services. The effects of diminishing marginal utility can then be utilized to establish price points or create marketing offers. The goal is to capture a new level of sales through targeted volume price strategies.

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