Hi Everyone,

This post contains a video which is a follow up to my written post Economic Concepts #10 – Marginal Utility. I recommend that you read this post as well as watch the video.

YouTube Version

Just in case, the 3Speak version becomes unavailable at some point. I have also uploaded the video to YouTube.

Summary of video

This video consists of three key areas. The video defines and explains marginal utility. The video explains how utility diminishes with consumption. The video considers how marginal utility differs depending on the consumption of substitutes and/or complementary goods.

Marginal Utility Definition

Marginal utility is the additional utility (i.e. satisfaction) obtained from each unit of a good or service consumed.

I have presented videos that discuss utility. In this video, my focus is on one very important aspect of utility. Utility has a tendency to decrease as more of something is consumed. A very simple example of this is food. Imagine you like burgers and you are very hungry. The first burger you eat will be very satisfying. After eating a couple of burgers, you will start to feel quite full. If you are to eat a third or fourth burger, you will feel far less satisfied as you start to become bloated. You may even turn down a free burger.

Substitutes and complementary goods greatly affect the extent of diminishing marginal utility. For example, furniture. A house can only hold so much furniture. Imagine your lounge can comfortably fit either four armchairs, two armchairs and a sofa, or two sofas. If you buy a sofa, you could buy another sofa or you could buy two armchairs. If you choose to buy two armchairs, the utility from obtaining a second sofa falls greatly, as the sofa no longer fits in the lounge as you have met your seating needs. In this case, the armchairs are substitutes to the acquisition of a second sofa. However, sofas and armchairs are often sold together as lounge sets. Therefore, in lower quantities they are often considered as complements. Which goods and services are considered complements and substitutes is not always straightforward.

In regards to complements, acquiring a complement can reduce the extent of the reduction in marginal utility of obtaining more of something. For example, battery operated devices require batteries. If a person has two devices that require two batteries each. The marginal utility of obtaining the fifth or sixth battery is lower than the marginal utility of obtaining the second or third battery. If that person acquires another device that requires batteries, the utility of obtaining the fifth and sixth battery becomes higher.

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