Marginal Utility and Marginal Value: An Overview
Depending on the context, marginal utility and marginal value can describe the same thing. The keyword for each is "marginal;" that is, the incremental change based on the per-unit shift in a good or service. This may sound complicated, but it really is not. Once you understand the meaning behind the related economic concepts, it is easy to see the differences between the two terms.
Marginalism was first formulated into a formal theory in the 1870s, when economists suggested that human beings make decisions "on the margin." For example, marginalism explains the differences in the value of goods and services by considering their marginal utility.
- Marginalism explains the differences in the value of goods and services by considering their marginal utility.
- In some contexts, marginal utility and marginal value can mean the same thing.
- Marginal value is what one more unit of a good is worth to you.
- The more utility an item has, the more value human beings are willing to assign to it.
- Marginal utility is personal, and what has utility for one person might not have the same utility for another.
We can use the example of iPhones and water to explain marginal utility. iPhones are more expensive than water because iPhones are luxury items that bring greater satisfaction to whoever possesses them. Although water has greater total utility—it is necessary to sustain life—the iPhone has greater marginal utility
This helps explain why one additional unit of water is rarely as valuable as one additional iPhone, even though water is necessary for life, and iPhones are unnecessary consumer goods. Thus, when a business owner or individual makes an economic decision, they do so marginally, based on how valuable one extra unit of that item is to them at a specific point in time.
Utility is the economic term for satisfaction. A basic economic insight is human beings act purposefully to satisfy wants or to remove discomfort. The more utility an item has, the more value human beings are willing to assign to it. In this way, utility can be synonymous with subjective human value.
Another way to think of marginal utility and value is to imagine that you are deciding how many apples to consume. Presumably, you would prefer to have one apple to having none. If the only alternative was to have 21 apples a week or 20, you might still want the extra apple, but it would not be worth as much to you as having that first apple. So, marginal utility decreases as the quantity of apples increases, and, at some point, you do not want any more apples, and the marginal utility of another apple is zero.
Marginal value is what one more unit of a good—the apple—is worth to you in terms of other goods. Unlike marginal utility, marginal value is in principle because it is difficult to measure how much value different individuals place on items, or the value of one more of that item.
Utility, however, is not the same thing as market value, which is expressed in dollars. Utility is personal: what has utility for one person might not have the same utility for another. A keen cyclist might assign a high level of utility to a new bicycle, whereas a runner would assign more utility to a pair of running shoes. Market value, on the other hand, is aggregated and impersonal.
For example, if a toy company increases its marginal value by boosting its economies of scale, this has nothing to do with an individual's marginal utility. Here, marginal value just means an incremental increase in market value.