Marginal utility of money

economic-dictionary

The marginal utility of money is the utility of an additional unit of money.

The marginal utility of money is the profit or utility that we obtain when we have an additional unit of money. It is a concept similar to the marginal utility that goods or services report to us, nothing more than in this case the utility obtained is indirect. That is, we do not make a profit from money itself, but from what it can buy.

Marginal income

Marginal utility of diminishing money

The utility of an additional unit of money is decreasing. While we have few units of money (perhaps we are deeply in debt), an additional amount of money will bring us great relief and satisfaction.

However, as our income increases, additional amounts of money will be welcome but will deliver a much lower profit than when we had very little income. In the extreme case, if a person is a multimillionaire, an additional amount of money will be good for him but the profit obtained will be quite small. Therefore we say that its marginal utility is decreasing.

Risk aversion

That the marginal utility of money is decreasing is related to the fact that most people are averse to the risk of losing money.

Losing an amount of money has a greater negative impact than winning the same amount of money. Considering the above, in fair bets or games, where the expected value of the win is equal to the safe amount if rejected, risk-averse people will prefer not to play.

Insurance and the marginal utility of money

Since the marginal utility of money is decreasing and people are generally reluctant to risk losing money, there is an insurance market. People are willing to pay a certain amount of money in order to eliminate or reduce the risk of losses.

Marginal analysis

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