Drink a glass of water when you are parched and it tastes incredible. Drink a second and it is still good. By the fourth, you are done. The satisfaction each glass delivers falls as you consume more. That satisfaction is utility, and its decline is the law of diminishing marginal utility, one of the oldest ideas in economics.

Utility is not measurable in any physical sense. You cannot look at a banana and read off its utility the way you read its weight. Economists treat it as an ordinal ranking: people can say they prefer one bundle of goods to another, but not by how much. Early utilitarians like Jeremy Bentham thought utility could be summed across society, and that the best policy maximizes total happiness. Modern economists are more cautious. Comparing utility between people is fraught, which is why welfare economics is such a contested field.

The concept still earns its keep. It explains why insurance is attractive: a dollar lost in a disaster hurts more than a dollar gained in good times. It underpins consumer choice theory, where people allocate income to maximize total utility subject to a budget. And it clarifies why water, which is essential, costs less than diamonds, which are not. Scarcity and marginal utility, not usefulness alone, set prices.

Utility concepts

• Total utility: overall satisfaction from consumption
• Marginal utility: satisfaction from one more unit
• Diminishing marginal utility: each extra unit satisfies less
• Ordinal utility: ranking without measuring