Why marginal utility matters
Pricing and demand
Businesses rely on marginal utility to set prices, particularly in the case of items with zero marginal utility. If consumers gain less satisfaction from additional units, they are unlikely to pay the same price for more. Selling in bulk is one way to remedy this, or selling an addictive substance like nicotine. Stores like Costco offer incredible discounts for bulk purchases because the additional utility of extra items is lower, and consumers need the incentive to buy more. A shopper may buy one expensive coffee but may think twice about purchasing a second one at full price because the satisfaction gained does not justify the cost. This is why businesses use strategies like "buy one, get one half off" to lure customers.
Taxing the citizens of the world
Most people reading this will be living in a country with a progressive tax system, like the United States. The United States has a progressive income tax system, meaning the more you earn, the greater percentage of your income is taxed. The reasoning behind it is that as a person earns more money, each additional dollar provides less benefit to their overall well-being compared to someone with a lower income.
If a person earning $30,000 per year receives an extra $1,000, that money might significantly improve their quality of life, covering rent, groceries, or the increasingly expensive medical bills. However, if someone earning $1 million per year receives an additional $1,000, the impact on their daily life is negligible since they are already financially secure. True, they might not be able to buy the latest yacht or ask a European country to dismantle a historic bridge to move it, but they will be able to easily survive with the essentials.
Applying marginal utility in decision-making
Budgeting for value
Consumers can use marginal utility to optimize spending. If one enjoys both coffee and tea but finds that an extra cup of coffee provides less satisfaction than an extra cup of tea, changing one's spending accordingly can increase overall satisfaction.
Businesses pricing strategies
Companies use marginal utility analysis to determine optimal pricing structures. Many software-as-a-service (SaaS) businesses will develop their pricing based on the concepts of marginal utility. Streaming services, for example, offer subscription models rather than per-movie pricing, knowing that the perceived value of individual movies declines over time.
Investment decisions
Investors and financial analysts consider marginal utility when evaluating risk and returns. A person investing their first $1,000 may gain significant utility, but adding another $1,000 might not have as much impact. This concept helps balance risk and diversification in portfolio management.
