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.

RELATED FAQS
  1. What does marginal utility tell us about consumer choice?

    Learn how marginal utility influences consumer choice under the law of diminishing marginal utility and consumer decisions ... Read Answer >>
  2. What is the difference between marginal utility and marginal value?

    Find out what marginal utility and marginal value mean in economics and why these terms sometimes overlap to describe the ... Read Answer >>
  3. What kind of investors buy utility stocks?

    Take a look at why income investors like utilities, why value investors might like utilities and why growth investors tend ... Read Answer >>
  4. What are the top investing strategies for investing in the utility sector?

    Employ the right strategies when investing in the utility sector, and you can see consistent returns with less risk than ... Read Answer >>
  5. What is the average annual growth rate of the utilities sector?

    Learn about the average annual growth rate for utilities companies' revenues and earnings per share over the last five years ... Read Answer >>
  6. How do economists and psychologists calculate diminishing marginal utility differently?

    Find out why disagreements about the validity of the law of diminishing marginal utility usually boil down to arguments about ... Read Answer >>
Related Articles
  1. Insights

    Explaining Marginal Utility

    Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or service.
  2. Investing

    5 Popular Utilities ETFs in 2016 (XLU, NEE)

    Discover how the five most popular utilities ETFs for 2016 can add growth and income to your portfolio. Four of these utilities ETFs outperformed the S&P 500.
  3. Financial Advisor

    Why Utility Stocks Are No Longer a Safe Haven

    Utility stocks have been the best performing sector in the S&P 500 Index so far this year but many believe they are now overvalued.
  4. Investing

    The Top 5 Utility ETFs for 2016 (XLU, IDU)

    Discover the top utility company ETFs, and learn more about how you can get exposure to water, electricity and natural gas utility companies.
  5. Investing

    How Utilities ETFs Deal With Rising Rates

    Utilities stocks and ETFs may be vulnerable to rising interest rates, but there are other factors to consider.
  6. Investing

    The Top 5 Utility Mutual Funds for 2016

    Understand how utilities equities play a role in asset allocation, and discover the best utilities mutual funds to consider for 2016.
  7. Investing

    Utilities ETFs to Date 2016 Performance Review (UPW, FXU)

    Discover the best and worst performing exchange-traded funds (ETFs) within the domestic and international utilities sector year-to-date.
  8. Trading

    Invest in Utilities With These ETFs (XLU, JXI)

    The strong uptrends shown on the charts of these utility ETFs suggest now could be the time to buy.
RELATED TERMS
  1. Total Utility

    The aggregate level of satisfaction or fulfillment that a consumer ...
  2. Utilities Sector

    A category of stocks for utilities such as gas and power. The ...
  3. Law Of Diminishing Marginal Utility

    The Law Of Diminishing Marginal Utility is a law of economics ...
  4. Utility Revenue Bond

    A type of municipal bond that is issued to finance utility projects, ...
  5. Electric Utilities Industry ETF

    An exchange-traded fund that invests in companies which generate ...
  6. Marginalism

    The study of marginal theories and relationships within economics. ...
Hot Definitions
  1. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  2. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  5. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
  6. Interest Rate Swap

    An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for ...
Trading Center