Economics Marginal Utility Questions Medium
The relationship between marginal utility and income can be described as follows:
Marginal utility refers to the additional satisfaction or benefit that a consumer derives from consuming one additional unit of a good or service. It is based on the principle of diminishing marginal utility, which states that as a person consumes more of a good or service, the additional satisfaction derived from each additional unit decreases.
Income, on the other hand, represents the amount of money or resources that an individual or household earns over a given period. It is a key determinant of a person's purchasing power and ability to consume goods and services.
The relationship between marginal utility and income can be understood in terms of the income effect. As a person's income increases, their ability to purchase goods and services also increases. This leads to a higher level of overall consumption and, consequently, a higher level of marginal utility.
However, it is important to note that the relationship between marginal utility and income is not linear. Initially, as income increases, the marginal utility of additional income may be relatively high, as it allows for the satisfaction of basic needs and the acquisition of essential goods and services. However, as income continues to increase, the marginal utility of additional income tends to decrease. This is because as individuals satisfy their basic needs, the additional satisfaction derived from each additional unit of income diminishes.
In summary, the relationship between marginal utility and income is that as income increases, the overall level of consumption and marginal utility tends to increase. However, the marginal utility of additional income diminishes as income rises, reflecting the principle of diminishing marginal utility.