Marginal Utility & How Savings Will Support?

Economics defines utility as the measure of satisfaction or happiness gained from the purchase of a product or service. Marginal utility is the added satisfaction a consumer gets from consuming an additional unit of a product or a service. This helps economists determine the quantity of an item an individual is willing to purchase.

The value of satisfaction achieved from the first purchase is way more than the second or the third purchase. Marginal utility declines with more and more purchases.

Income and marginal utility

You could earn money from wages, business, investment, rent or lease, and other sources. The corpus an individual earns as income is used to buy requirements and wants to lead a healthy and happy life. Human beings usually spend to buy the most essentials first, and then based on financial availability, plan further acquisitions.

E.g.: If an individual earns Rs.10,000, they will first use the money for monthly expenses. If the same individual earns Rs.10,100 next month, they might utilize the extra Rs.100 to buy a movie ticket rather than more of essentials. In the 2nd case; according to utility, the movie ticket will rank higher than any essential.  

Types of marginal utility

Positive marginal utility is felt when procuring an object brings additional satisfaction. Like eating ice-cream, after the first spoon, the second spoon brings some more happiness. In such a situation, the marginal utility is positive. 

Zero marginal utility is felt when procuring more of something brings no extra happiness. The same ice-cream after six or seven spoons wouldn’t really bring any happiness. In this situation, the marginal utility is zero.

Negative marginal utility is felt when we procure too much of any item and it becomes a matter of dis-interest. Under such a circumstance, marginal utility could be tagged as negative.

Law of diminishing marginal utility

Marginal utility is depreciating in nature, and further consumption of the same product may become irrelevant. Initial consumption holds the highest value for any product, and every unit of consumption after that will hold less value. To counter this effect of marginal utility, consumers buy multiple products.

How savings help to reach optimal marginal utility?

Since marginal utility is the level of satisfaction associated with a purchase or a service, you could plan to open a savings account online to save with the goal of purchasing the product you are eyeing. Another option is to cut unnecessary spending and prioritize your needs.

5 easy steps to save money

1. Set goals

It has been observed that if you have a plan both short term and long term it is easier to save money. Think of the product for which you are saving, consider the pricing and distribute your savings plan on a monthly basis.

2. Track expenses

Tracking your expenses allows you to plan your savings. Once, the monthly expenditure data is in front of you it will be easy to cut unnecessary expenses.

3. Cut on your spends

You could try and cut unwanted spending, and put that money into monthly Recurring Deposits.

4. Avoid using excess credit

Even though it is tempting to avail credit to purchase a product, the repayment process is daunting. It is better to save first, before you go ahead and make the purchase.

5. Open a savings account

You can always open a savings account and deposit your earnings. The bank will pay interest on the deposited amount. This is a safe and secure way to start saving for your goal.

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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

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