Explain the Law of Diminishing Marginal Utility
The Law of Diminishing Marginal Utility is one of the most fundamental laws of Microeconomics. It plays a crucial role in understanding consumer behavior, demand theory, and decision-making in daily life.
This law explains why consumers do not continue consuming unlimited quantities of the same commodity and why demand curves slope downward.
The concept was originally developed by Carl Menger (1840–1921) and later systematically explained by Alfred Marshall, who popularized it in economic theory.
What is Utility in Economics?
In economics,
Utility refers to the capacity of a good or service to satisfy human wants.
Utility is the satisfaction or benefit derived by a consumer from consuming goods or services.
Utility is:
Subjective (differs from person to person)
Measurable in theory in terms of utils (as assumed by Alfred Marshall)
Marginal Utility: This is the additional satisfaction gained from consuming one more unit of a good or service. It represents the change in total utility resulting from an additional unit consumed.
Types of Utility
1. Total Utility (TU)
Total Utility is the total satisfaction obtained from consuming a given quantity of a commodity.
2. Marginal Utility (MU)
Marginal Utility is the additional satisfaction gained from consuming one more unit of a commodity.
𝑀𝑈=Δ𝑇𝑈/Δ𝑄
MU=ΔTU/ΔQ
Definition of Law of Diminishing Marginal Utility
Alfred Marshall’s Definition
“During the process of consumption, as more and more units of a commodity are consumed, the marginal utility derived from each successive unit goes on diminishing, other things remaining constant, though total utility may increase.”
Statement of the Law
The Law of Diminishing Marginal Utility states that:
As a consumer consumes successive units of a commodity, the utility derived from each additional unit decreases.
In simple words:
The first unit gives maximum satisfaction
Every next unit gives less satisfaction
Eventually, marginal utility may become zero or even negative
Explanation of the Law of diminishing marginal utility
Initially, the consumer satisfies the most urgent wants. As consumption increases, the intensity of wants declines, resulting in diminishing satisfaction from additional units.
Thus:
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Marginal Utility decreases
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Total Utility increases at a diminishing rate
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After a certain point, Total Utility becomes maximum
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Beyond that point, Total Utility starts declining
Example law of diminishing marginal utility
Example: Consumption of Pizza
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1st slice: Very high satisfaction (high MU)
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2nd slice: Less satisfaction
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3rd slice: Further reduction in satisfaction
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4th slice: Very little satisfaction
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5th slice: No satisfaction (MU = 0)
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6th slice: Discomfort (negative MU)
This example clearly shows diminishing marginal utility with increased consumption.
Law of Diminishing Marginal Utility – Schedule
| Units Consumed | Total Utility (Utils) | Marginal Utility (Utils) |
|---|
| 1 | 20 | 20 |
| 2 | 38 | 18 |
| 3 | 54 | 16 |
| 4 | 66 | 12 |
| 5 | 70 | 4 |
| 6 | 68 | -2 |
Explanation of Schedule
Total Utility increases up to the 5th unit
Marginal Utility keeps declining
At the 6th unit, Marginal Utility becomes negative
Total Utility starts falling after reaching maximum
Mathematical Representation
Mathematically, the Law of Diminishing Marginal Utility is expressed as:
[ MUn > MU{n+1} ]
Here, (MU_n) is the marginal utility of the (n)th unit, and (MU{n+1}) is the marginal utility of the (n+1)th unit, showing that the utility from an additional unit is less than that from the previous unit.
Assumptions of the Law of Diminishing Marginal Utility
The law holds true under the following assumptions:
Quality of goods remains constant
Consumption is continuous
Consumer’s taste and preference remain unchanged
Units of goods are homogeneous
Income of consumer remains constant
Utility is measurable in utils
Consumption is for a single purpose
Implications of the Law of diminishing marginal utility
1. Consumer Choice: This law explains consumer choice and the demand curve. As the marginal utility of a good decreases, consumers are willing to pay less for additional units, creating a downward-sloping demand curve.
2. Optimal Consumption: Consumers aim to equalize the marginal utility per dollar spent across all goods to maximize total utility, known as the equi-marginal principle.
3. Pricing and Marketing: Businesses use this law to set prices and design marketing strategies. For example, they may offer bulk discounts to encourage more purchases, compensating for diminishing marginal utility.
Limitations of law of diminishing marginal utility
Subjectivity: Utility is subjective and varies between individuals, making precise quantification difficult.
Assumption of Rationality: The law assumes consumers are rational and aim to maximize utility, which may not always hold true due to behavioral biases.
Ceteris Paribus: The law assumes other factors remain constant. In reality, factors like income changes, preferences, and external conditions can impact consumption and utility.
The Law of Diminishing Marginal Utility is fundamental to microeconomic theory, offering insights into consumer behavior and market dynamics. It explains why consumers diversify their consumption and why demand curves slope downward. Understanding this law is crucial for economists and businesses to analyze and predict consumer decisions and market trends.
In the field of economics, the law of diminishing marginal utility is a fundamental concept that describes how our satisfaction or utility from consuming additional units of a good or service decreases as we consume more of it. This principle is based on the idea that the more we have of something, the less we tend to value each additional unit.
We will explore the law of diminishing marginal utility in detail, its implications, and how it influences our decision-making.
In the field of economics, the law of diminishing marginal utility is a fundamental concept that describes how our satisfaction or utility from consuming additional units of a good or service decreases as we consume more of it.
This principle is based on the idea that the more we have of something, the less we tend to value each additional unit.
We will explore the law of diminishing marginal utility in detail, its implications, and how it influences our decision-making.
Importance of Law of Diminishing Marginal Utility
1. Consumer Behavior
Helps understand how consumers allocate limited income to maximize satisfaction.
Understanding consumer behaviour concept is crucial for businesses aiming to maximize customer satisfaction.
By recognizing that additional units of a product or service provide diminishing levels of utility, businesses can tailor their offerings, pricing strategies, and marketing efforts to better meet consumer needs.
2. Basis of Demand Curve
Explains why the demand curve slopes downward.
3. Rational Decision Making
Consumers distribute resources where marginal utility is highest.
4. Pricing and Marketing Strategies
Businesses use:
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Price discrimination
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Bulk discounts
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Combo offers
Rational Decision-Making
The law of diminishing marginal utility influences how individuals make choices. When faced with limited resources, individuals tend to allocate them based on their marginal utility.
For example, if you have $10 and you already own a smartphone, spending the entire amount on another smartphone would provide little additional utility compared to using the money for other needs.
Pricing Strategies
Businesses often implement price discrimination strategies of consumer behaviour based on the law of diminishing marginal utility. They might offer different packages or pricing tiers to cater to consumers with varying levels of demand and willingness to pay.
By doing so, businesses can capture a larger portion of the market and maximize their profits.
Resource Allocation
Governments and policymakers also consider the concept of diminishing marginal utility when making decisions about resource allocation.
For instance, they may focus on redistributing resources to address basic needs first before allocating additional resources to luxury goods or services.
In this article you will study about following content given below:-
- Definition of Law Of Diminishing Marginal Utility
- Detailed explanation of Law Of Diminishing Marginal Utility with help of suitable Schedule and Diagram.
- Assumption Of The Law Of Diminishing Marginal Utility.
What is Utility Means in Economics
First we should know about basic definition of Utility. Utility can be defined as Is the capacity of a Goods or Commodities through which consumer's want satisfied.
The law of diminishing marginal utility states that as an individual consumes more units of a particular good or service, the additional utility or satisfaction gained from each additional unit gradually decreases. In simpler terms, the first unit of a product or service consumed provides the most utility, while subsequent units provide diminishing levels of satisfaction.
To illustrate this concept, let's consider a basic example. Imagine you are eating a slice of burger. The first burger brings you immense pleasure and satisfaction. As you continue to eat more burgers, the enjoyment you derive from each additional burger diminishes.
Eventually, you might reach a point where you no longer derive any pleasure and may even feel discomfort from consuming too much burgers.
Definition of Law Of Diminishing Marginal Utility Economics
The Law Of Diminishing Marginal Utility was given and explained by Alfred Marshall. Alfred Marshall in his Definition of Law Of the Marginal Utility following things will happens –
Any Individual (any one) during the process of consumption, as more successive units are taken up, every successive units will gives satisfaction at Diminishing rate by maintaining other things constant, although total utility remains increases.
Here one points should always note down Utility always measurable quantity Utils.
Detailed Explanation Of The Law Of Diminishing Marginal Utility
We can briefly explain the Law Of Diminishing Marginal Utility with the help of an example. Let assumes that the consumer consumes 6 cup of Teas. The first cup of Teas give him 20 utils . when he consumes second and third cups of teas, the marginal utility of each additional cup of teas will be lesser.
This examples proves that points that every successive unit of a commodity used gives the utility with the diminishing rate.
We can further explain with the help of Schedule for Law Of Diminishing Marginal Utility.
Marginal Utility at the starting means at the consumption of first units of commodity will be positive and as the successive quantity consumed then Marginal Utility start decreased. Marginal Utility can be converted into negative Utility value.
Total Utility obtained from the consumption of first apple is 20 utils, which keep on increasing upto 5 units it will be Total Utility will be maximum. When we consume 6th apple units then Marginal Utility Utils become negative and Total Utility value showing fall.
Assumption of The Law Of Diminishing Marginal Utility
To make prove for Law Of Diminishing Marginal Utility we need to make certain Assumption. Each Assumption are quite logical and understandable.
- The quality of successive unit should remain constant.
- If the quality of goods increases or decreases, then Law Of Diminishing Marginal Utility will not proven.
- Consumption of should be continuous.
- Consumers outlook should not change
Conclusion of Law of Diminishing Marginal Utility
The law of diminishing marginal utility is a crucial concept in economics, highlighting the diminishing satisfaction or utility derived from consuming additional units of a good or service.
Understanding this principle helps individuals make rational decisions, aids businesses in optimizing their offerings, and assists policymakers in resource allocation.
Recognizing the diminishing marginal utility, we can strive to maximize our satisfaction and allocate resources more efficiently, leading to improved overall welfare and well-being.