Marginal Utility
Plain definition
Marginal utility is the extra satisfaction gained from consuming one additional unit of a good — the change in total utility divided by the change in quantity. Rational consumers keep buying until the marginal utility per rupee is equal across all goods.
In economics
Marginal utility is the engine of consumer choice: the equimarginal principle says utility is maximized when marginal utility divided by price is equal for every good purchased. It also resolves the water-diamond paradox — water has huge total utility but tiny marginal utility at typical consumption levels, so its price is low.
Example
The first slice of pizza gives you 20 units of satisfaction, the second 14, the third 8 — each slice's marginal utility is the extra satisfaction that slice adds. You stop ordering when the next slice's marginal utility per rupee falls below what that money could buy elsewhere.
Marginal utility is constantly confused with total utility. Total utility is the satisfaction from all units consumed; marginal utility is only what the last unit added. The water-diamond paradox dissolves here: water's total utility is enormous, but its marginal utility — and hence its price — is small because we already consume so much of it.