What is marginal utility and how will savings support the cause?

Economics has defined utility as the measure of satisfaction or happiness gained from the purchase of a product or service.

Marginal Utility is the added satisfaction a consumer gets from consuming an additional unit of a product or a service. This helps economists determine, the quantity of an item an individual is willing to purchase.

The value of satisfaction achieved from the first purchase is way more than the second or the third purchase. Marginal Utility declines with more and more purchases.

Income and Marginal Utility

You could earn money from wages, business, investment, rent or lease, and other sources. The corpus an individual earns as income is used to buy requirements and wants to lead a healthy and happy life. Human beings usually spend to buy the most essentials first, and then based on financial availability, plan further acquisitions.

E.g.: If an individual earns ₹10,000, he will first use the money for monthly expenses. If the same individual earns ₹10,100 next month, he might utilize the extra ₹100 to buy a movie ticket rather than an extra kilo of sugar. In the 2^nd case; according to utility, the movie ticket will rank higher than sugar.  

Economists have noticed that Marginal Utility is diminishing in nature, and as income increases there is a rather smaller increase in satisfaction. As it is easy for the individual to purchase a product or service and soon he will hit negative Marginal Utility.

This again is a reason, why we tend to look for better or costlier investments and indirectly try to soar our income to reach Marginal Utility.

Types of Marginal Utility

Positive Marginal Utility is felt when procuring an object brings additional satisfaction. Like eating ice-cream, after the first spoon, the second spoon brings some more happiness. In such a situation, the Marginal Utility is positive. 

Zero Marginal Utility is felt when procuring more of something brings no extra happiness. The same ice-cream after six or seven spoons wouldn’t really bring any happiness. In this situation, the Marginal Utility is zero.

Negative Marginal Utility is felt when we procure too much of any item and it becomes a matter of dis-interest. Under such a circumstance, Marginal Utility could be tagged as negative.

Law of Diminishing Marginal Utility

Marginal Utility is depreciating in nature, and further consumption of the same product may become irrelevant. Initial consumption holds the highest value for any product, and every unit of consumption after that will hold less value. To counter this effect of Marginal Utility, consumers buy multiple products.

How savings help to reach optimal marginal utility?

Since, Marginal Utility is the level of satisfaction associated with a purchase or a service, we could plan to save with the goal of purchasing the product we are eying. Another option is to cut unnecessary spending and prioritize our needs.

5 easy steps to save money

Set goals – It has been observed that if you have a plan both short term and long term it is easier to save money. Think of the product for which you are saving, consider the pricing and distribute your savings plan on a monthly basis.

Track expenses – Tracking your expenses allows you to plan your savings. Once, the monthly expenditure data is in front of you it will be easy to cut unnecessary expenses.

Cut on your spends - You could try and cut unwanted spending, and put that money into monthly Recurring Deposits.

Avoid using excess credit - Even though it is tempting to avail credit to purchase a product, the repayment process is daunting. It is better to save first, before you go ahead and make the purchase.

Open a savings account - You can always open a savings account and deposit your earnings. The bank will pay interest on the deposited amount. This is a safe and secure way to start saving for your goal.

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