First, it is necessary to establish the total utility of a good. Total utility is the total amount of satisfaction that a person receives from consuming a certain amount of a good. For example, if you eat one slice of pizza and feel satisfied, then your total utility for that slice of pizza is one.
Next, it is important to determine the change in total utility that is achieved when an additional unit of the good is consumed. This is the marginal utility. For example, if you eat a second slice of pizza and feel less satisfied than you did after the first slice, then the marginal utility of the second slice of pizza is negative.
To calculate marginal utility, you will need to know both the total utility and the amount of the good that has been consumed. You will also need to know the change in total utility that is achieved by consuming an additional unit of the good.
The formula to calculate marginal utility is as follows:
Marginal Utility = Change in Total Utility / Change in Quantity
For example, if a person eats two slices of pizza and their total utility is 10, and then eats a third slice of pizza and their total utility increases to 12, the change in total utility is 2. If the person consumed two units of pizza to achieve this change in total utility, then the change in quantity is 2. Therefore, the marginal utility of the third slice of pizza is 2/2, or 1.
It is important to note that as additional units of a good are consumed, the marginal utility of each additional unit will begin to decrease. This concept is known as the law of diminishing marginal utility. Essentially, the more that is consumed, the less satisfaction that is achieved from each additional unit.
Understanding marginal utility is important in many areas of economics, such as pricing and production decisions. By knowing how much additional satisfaction is achieved by consuming an additional unit of a good, businesses can determine the optimal price to charge for their products. Additionally, by understanding how much additional satisfaction is achieved by producing an additional unit of a good, businesses can ensure that they are producing goods that are in high demand and will generate a profit.
Overall, calculating marginal utility is a fundamental concept in economics. By understanding how much additional satisfaction is achieved by consuming an additional unit of a good, individuals and businesses can make informed decisions about pricing, production, and consumption.