Marginalism is one of the more important concepts in economics. It answers the question: why do people pay more for diamonds than water, when the total value of water is higher?

Pure rationalism fails to describe economic behavior. Consumerism is determined by subjective incremental preferences. The marginal value per unit of water decreases once our basic needs are met. Marginalism describes how consumers decide how much of something they will buy.

Take a meal. Each meal costs $2.00
Expected utility is equal to the marginal utility per unit minus the cost of the unit
After he eats his meal, he’s not as hungry so the marginal utility of a second meal is less than the first one. The third meal will be valued even less. Since he’s full, he would lose money if he keeps buying meals he cannot eat.

You can measure the added marginal benefit of each meal compared to the opportunity cost of each meal. The opportunity cost remains $2 for each meal.
1st: $2.25
2nd: $1
3rd: $0.50
4th: $0.25

If he buys all 4 meals, he gets an expected total benefit of $4 at a cost of $8. This is irrational, so we expect him to stop spending after the first meal. The first meal gets rid of the hunger – they second meal overstuffs him.

This is subjective. Some people may get greater value from eating two meals buy will stop before they buy a third.

Back to diamonds and water – IF a man is in the Sahara desert, dying of dehydration, then a bucket of water has great marginal value, greater than diamonds.

This leads to the Law of Diminishing Marginal Benefits. People will continuing doing something so long as the benefits are positive. Doing too much eventually causes negative benefits as opportunity costs exceed marginal benefits.

Marginalism explains the ideas behind marginal costs of production and marginal benefits of consuming in the economy.

Here’s a better primer on Marginalism

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