Imagine you are in a desert. You have been walking for 3 days and have had no access to water. All of a sudden, a merchant comes across you and presents you with a choice. For one coin, he can give you a bottle of water or a diamond. Parched, you buy the water and continue your journey refreshed.
While the diamond would have seemed like a better choice, since it was valued at the same price as the water, the diamond would not have solved your problem of thirst and it would not have been useful. Then, another merchant comes, you buy a water, then another, you still pick the water, but after a certain point, where you have plenty of water and can’t carry it anymore, your priorities will shift. You will then start picking the diamond since one extra water will no longer be an asset to your journey, and the diamond can be sold and you can gain profit on it. The point at which you alter your choice highlights the concept of the law of marginal utility.
Let’s take a step back though, and define marginal utility. Marginal utility refers to the benefit gained from consuming one additional unit of a product or service. Therefore, the law of diminishing marginal utility in simple terms states that no matter how amazing a product is, the more a consumer buys from it, the less satisfaction they gain from the purchase. For instance, buying the first makeup product is an exciting moment in any teenage girl’s life, but as you get the means to buy more, you get less excited with every new purchase. Especially since humans have a relatively short joyful period after buying new items.
An example of how marginal utility is used in a real life setting is bundle sales. Firms take advantage of the fact that consumers are usually likely to spend the highest amount on their first purchase, making prices initially higher. For example an outlet store may have a bundle sale on a specific brand of coats. The first coat would cost $120, then two coats would cost $200 and finally, 3 coats would cost $275. Obviously, in the last case, the coats have the best value for money, but realistically, not all buyers would need 3 winter coats, especially if they look very similar.
However, at this point in the article you might wonder, what doesn’t adhere to the law of marginal utility? (Because in economics there’s usually exceptions). For example rare collector’s items, such as Pokemon cards (since getting more expands the collection), or limited edition purchases such as a special edition of a shirt (giving the user an exclusive feel), or goods that you are addicted to such as cigarettes (every purchase will yield the same satisfaction). These are some examples of goods where the satisfaction does not change with every new purchase or it increases. Marginal utility is very useful when pricing products and is present in a lot of different economic decisions, and I hope you can apply it to make calculated decisions from now on.
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