Marginal utility refers to the degree of satisfaction increased by one unit increase in the consumption of a certain item. The meaning of margin is increment, which refers to the increase in the dependent variable caused by the increase in the independent variable. In marginal utility, the independent variable is the amount of a good consumed, and the dependent variable is satisfaction or utility. The change in utility caused by a change in consumption is the marginal utility.

The size of marginal utility is directly proportional to the strength of desire and inversely proportional to the quantity of commodity consumption. In practice, marginal utility can be 0 or even negative, but in theoretical analysis, marginal utility will not be 0 or negative value.

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Marginal utility theory can also explain the famous "value paradox" in economics. The paradox of value, also known as the puzzle of value, refers to the fact that some things have great utility but have a very low price, and some things have little utility but have a very high price. This phenomenon is inconsistent with traditional price theory. This value paradox was proposed by Adam Smith more than 200 years ago, and a satisfactory answer was not given until the marginal utility theory was proposed. The key to explaining this problem is to distinguish between total utility and marginal utility.

The total utility that water brings to us is huge. We cannot survive without water. But the more we consume a certain good, the smaller the marginal utility of its last unit becomes. We use a lot of water, so the marginal utility of the last unit of water is negligible. On the contrary, compared to water, the total utility of diamonds is not large, but because we buy very few diamonds, its marginal utility is large.

According to the marginal utility theory, consumers allocate income in such a way that the marginal utility per dollar spent on all items is equal. People also allocate income between water and diamonds based on this principle: the marginal utility of diamonds is high and the marginal utility of water is low. Only by dividing the high price of diamonds by its high marginal utility and the low price of water by dividing its low Marginal utility, the marginal utility per dollar spent on diamonds and water must be equal.

So, it is reasonable for the price of diamonds to be high and the price of water to be low. In other words, it is a rational behavior for people to pay a high price for diamonds with high marginal utility and a low price for water with low marginal utility. The principle of "rare things are more valuable" is that "rare" items have high marginal utility.

Baidu Encyclopedia-Marginal Utility