The
marginal utility of money meaning
can be understood as it’s a concept in economics that applies universally. It is used to describe how individuals understand and value an additional unit of money.
It is the additional benefit that a person gets from consuming one more unit of a good or service.
Key points for
what is meant by marginal utility of money:
The principle of diminishing marginal utility is that as a person's income increases, the less each additional rupee is worth to you for satisfaction.
People allocate their incomes to spend more on items that provide a higher marginal utility.
It is also essential for analyzing consumer choices to maximize their total utility within their budget constraints.
Changes in income or goods and services prices also affect consumer choices.
Economists use this concept to explain consumer behavior and rational decision-making.
The marginal utility of money meaning is it helps in
understanding how individuals make choices related to spending, saving, and investment.
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Do you know what utility is? If not, it is important to know this term before diving into the marginal utility of money.
Utility in economics is a theory to measure value or satisfaction achieved after a consumer receives a good or service. Now what is marginal utility of money? Marginal utility of money is basically an amount by which an individual's utility would be increased if given a small quantity of additional money.
There are two ways through which additional money can increase utility.
If the consumer gets an additional wealth for consumption, then the marginal utility will be derived from that additional wealth.
If the consumer gets an additional wealth but doesn’t put it to consumption, rather holds on to it for the maximum utility. Therefore, the amount of money that the consumer holds enables the function of marginal utility of money.
Interestingly, marginal utility of money is diminishing in nature, i.e., as income increases, the consumers gain correspondingly smaller increase in satisfaction.
Let us understand with an example.Suppose Richa has zero income but then her income increases by Rs.2500 per week via home tuitions. This will considerably increase her satisfaction and give her an improved lifestyle and enough to spend.
However, assuming Richa already earned Rs.5000 and she gets an additional income of Rs. 2000. This will have a lesser impact on improving her standard of living.
In another scenario, if Richa earns Rs. 7000 per week and gets an additional income of Rs. 100, this will have no noticeable impact on her standard of living.
I hope this example clarified the concept of marginal utility of money.
What is Marginal Utility of Money?
Pushpendra
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2021-04-22T15:53:32+00:00 2021-04-23T14:33:58+00:00Comment
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