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.
