Utility is the satisfaction or benefit a person gets from consuming a good or service. It is subjective. A cup of coffee might bring great utility to one person and none to another. Economists use the concept to explain choice: people choose the option that gives them the most utility.

Utility is hard to measure directly. Early economists imagined a unit called the util. Modern economists prefer to rank preferences rather than assign numbers. If you prefer tea to coffee and coffee to juice, your preferences are consistent. That is enough to build models of choice.

Marginal utility is the satisfaction from one more unit. It usually declines. The first slice of pizza tastes great. The fifth is less appealing. This principle of diminishing marginal utility helps explain why people diversify their consumption and why demand curves slope downward.

Key concepts

• Total vs. marginal utility
• Diminishing marginal utility
• Ordinal vs. cardinal utility
• Consumer choice
• Indifference curves