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 is the marginal utility of income?

    Take a deeper look at marginal utility of income, why individuals tend to be more satisfied with more income and how measuring ... Read Answer >>
  4. 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 >>
  5. 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 >>
  6. What does the law of diminishing marginal utility explain?

    Learn about some of the important economic insights that can be derived from applications of the law of diminishing marginal ... 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

    Utility Funds: A Bright Choice In Bear And Bull Markets

    Gas, electric and water companies' non-cyclical nature can power strong gains in any portfolio.
  3. Insights

    Trust In Utilities

    Even in times of economic turmoil, utilities can be a good investment.
  4. Investing

    The Debt Report: The Utilities Sector

    Discover how blue chip U.S. utilities companies are using debt, and why it was important for the industry to deleverage after the financial crisis.
  5. 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.
  6. 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.
  7. Investing

    ETF Flows: Utilities ETFs Stand Tall in 2016

    Find out which utilities exchange-traded funds (ETFs) have benefited the most from the huge surge in fund inflows in the early part of 2016.
  8. 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.
  9. 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.
RELATED TERMS
  1. Marginal Utility

    The additional satisfaction a consumer gains from consuming one ...
  2. Law Of Diminishing Marginal Utility

    The Law Of Diminishing Marginal Utility is a law of economics ...
  3. Utility

    1. An economic term referring to the total satisfaction received ...
  4. Electric Utilities Industry ETF

    An exchange-traded fund that invests in companies which generate ...
  5. Expected Utility

    An economic term summarizing the utility that an entity or aggregate ...
  6. Marginalism

    The study of marginal theories and relationships within economics. ...
Hot Definitions
  1. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  2. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  3. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  4. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  5. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  6. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
Trading Center