Marginal Utility and Price

The relation between marginal utility and price is very important to the consumer. When the consumer purchases a good from the market, he pays a price. Price paid represents sacrifice of utility and commodity purchased represents the gain it utility. As the consumer goes on purchasing more and more, the marginal utility of the successive units will goes on diminishing. Will the price paid by the consumer go on diminishing? No, price is the same for all units of the good in the market. Therefore the consumer goes on comparing the price paid (utility sacrificed) with the marginal utility of the commodity in question. As long as marginal utility of the good is greater than the price, the consumer gains and he goes on purchasing the good. As goods purchased increases, marginal utility declines. The consumer will stop at the point where the declining marginal utility is equal to price.

Suppose a consumer wants to purchase apple from the market. He is willing to pay maximum $5 for the first apple. After consuming the same, he will be prepared to pay less for the second apple as it will fetch him less utility. Suppose he is willing to pay $3 for the second and $2 for the third and so on. But price is same for all units of apple. If price $2 in the market, he will purchase three units of apple so that ‘willing’ to pay’ becomes equal to the actual payment. Willing to pay represents gain in utility from the consumption of apple and actual payment. Willing to pay represents loss of utility. Therefore the consumer stops at the point where the marginal utility is equal to the price. If the price of apple goes up to $3, then he will purchase two apples, because here marginal utility is equal to price. Hence price feflects marginal utility and marginal utility indicates price. Both are directly related to each other.