Why do you choose to buy a coffee instead of a tea, or spend an afternoon at the movies instead of the park? Economics suggests these decisions are driven by a simple goal: maximizing your satisfaction. In economics, this satisfaction or happiness you get from consuming a good or service is called utility.

Utility is a personal and subjective concept. A sold-out concert ticket might have immense utility for a huge fan, but zero utility for someone who dislikes the band. It’s all about the value a specific person gets from a specific item at a specific time.

Economists look at utility in two different ways: total and marginal.

Total utility is the overall satisfaction you get from consuming a certain amount of something. If you eat three slices of pizza, your total utility is the combined happiness from all three slices.

Marginal utility, on the other hand, is the additional satisfaction you get from consuming one more unit. It's the change in your total utility when you go from one slice of pizza to two, or from two slices to three.

Let's go back to the pizza. The marginal utility of the second slice is the extra happiness it provides after you've already eaten the first. The marginal utility of the third slice is the extra bit of satisfaction you get after already eating two.

Let's track the utility of eating pizza slices. Imagine we could measure satisfaction in points called “utils.”

Notice how total utility keeps increasing with each slice, from 30 to 50 to 60. But the marginal utility tells a different story. The first slice gave you 30 utils of satisfaction. The second slice added 20 more utils (50 total - 30 previous = 20 marginal). The third slice only added 10 more utils.

This shows how your total satisfaction and your additional satisfaction from one more unit are related but distinct ideas. Understanding this difference is the first step in seeing how people make choices to get the most value from their decisions.

Let's review the key terms we've covered.

Ready to check your understanding?

Thinking about utility helps explain why we buy things, how much we're willing to pay, and when we decide we've had enough.