Society is attached to money, that’s why many people try to earn more at work or increase their sources of income. From getting a very well paid job to invest in the stock market or in cryptocurrencies, many think that there’s no limit to how money can satisfy us and that’s not true. There is one and it’s called marginal utility!
Imagine that you’re annual income is $100k. You live above the median income for U.S households in 2020 ($67 521), you can have a better house and different experiences with your family. You think you have a great life!
Now, let’s imagine that you live with an annual income of $500k and it increases to $600k (it increases $100k). With your $500k annual income you had even greater experiences and products (expensive vacations, restaurants, cars, houses etc…) and you could simply increase them a bit. The value, or better said, the utility of those $100k in difference is less significant than in the previous example, right? Going from $0 to $100k/year has more value than going from $500k to $600k/year.
And if you really want to expand in order to fully understand how the marginal utility of money works, you can try to compare the value of going from $5M to $5.1M (same $100k). You won’t even notice it because the utility that those $100k have in your wealth drops.
For all the readers that might be curious about the formula that defines the marginal utility, it can be represented like this:
Marginal Utility = (TUn-TUz)/(UCn-UCz)
Or in other words it can be defined as the “quotient between the change in total utility and the change in number of units consumed”.
This can be difficult to understand at first, but it simply says that the amount that a unity represents will decrease if the total amount of units increases. Just like the $100k (the unity) that had a higher marginal utility when they represented 100% of the total wealth (total amount of units) of the mentioned example, a smaller marginal utility when they represented a 1/6 of the total wealth in the second example and an insignificant marginal utility in the last example!
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