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Updated on 22nd March, 2023 , 7 min read
The Law of Diminishing Marginal Utility is a fundamental concept in economics. It is a concept that explains the relationship between the consumption of a good and the utility derived from it. The law states that as a consumer consumes more and more of a good, the marginal utility derived from each additional unit of the good decreases. In simple words, the more a consumer consumes a good, the less satisfaction they derive from each additional unit of the good.
Utility refers to the satisfaction or value that an individual derives from consuming a good or service. It is a subjective measure that varies from person to person and from situation to situation. The utility can be measured in different ways, such as through surveys, experiments, or consumer choices.'Utils' is considered as the measurable 'unit' of utility.
The concept of utility is central to economics, as it helps explain how individuals make choices about how to allocate their limited resources, such as money or time, among competing options. In general, people tend to choose options that provide the highest level of utility, or the most satisfaction or value per unit of cost.
The Law of Diminishing Marginal Utility can be explained using the following example. Let's say that you are hungry, and you buy a slice of pizza. The first slice of pizza will give you a high level of satisfaction, and you will enjoy it. As you eat more slices of pizza, the satisfaction you derive from each additional slice will decrease. You may still enjoy the second slice of pizza, but not as much as the first one. The third slice of pizza may not be as enjoyable as the second one, and so on. Eventually, you may become full, and the satisfaction you derive from each additional slice of pizza will become negative.
The concept of the Law of Diminishing Marginal Utility can be explained using the following equation:
MU = ΔTU / ΔQ
Where MU is the marginal utility, ΔTU is the change in total utility, and ΔQ is the change in the quantity consumed. The equation shows that as the quantity consumed increases, the marginal utility decreases.
The Law of Diminishing Marginal Utility has several applications in economics. One of the most important applications is in the pricing of goods and services. Businesses use the concept to determine the optimal price of their products. They understand that the more a consumer consumes a good, the less satisfaction they derive from each additional unit of the good. Therefore, they must price their products in such a way that the consumer is willing to pay for the additional units.
For example, let's say that a company sells ice cream. They understand that the more a consumer eats ice cream, the less satisfaction they derive from each additional scoop. Therefore, they must price their ice cream in such a way that the consumer is willing to pay for the additional scoops. They may offer a discount for buying multiple scoops of ice cream or offer different sizes of ice cream to cater to the consumer's needs.
The Law of Diminishing Marginal Utility also has applications in other areas of economics, such as public policy. The concept is used to determine the optimal level of taxation and to understand the relationship between income and happiness.
The graph below illustrates the Law of Diminishing Marginal Utility, which shows that as the number of units of a good consumed increase, the marginal utility of each additional unit decreases. The X-axis represents the quantity of the goods consumed, while the Y-axis represents the marginal utility derived from each additional unit consumed.
As we move along the curve from left to right, we see that the marginal utility gradually decreases, eventually reaching zero at a certain point. Beyond that point, consuming additional units of the good may even lead to negative utility, where overall satisfaction decreases. This means that after a certain point, the consumer may experience dissatisfaction from consuming more of the good.
Overall, the Law of Diminishing Marginal Utility explains why individuals tend to consume less of a good as the marginal utility of each additional unit consumed decreases over time.
Overall, the Law of Diminishing Marginal Utility suggests that as we consume or experience more of a good, the additional satisfaction or usefulness we derive from each additional unit or experience gradually decreases, eventually reaching a point of saturation or even dissatisfaction.
The assumptions of the Law of Diminishing Marginal Utility are:
Overall, the assumptions of the Law of Diminishing Marginal Utility are important because they allow economists to use the concept of marginal utility to analyze consumer behavior and make predictions about how consumers will behave under different conditions. However, it's important to recognize that these assumptions are not always met in reality and that consumer behavior can be influenced by a wide range of factors.
The Law of Diminishing Marginal Utility has some exceptions and limitations. Here are a few examples:
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By - Nikita Parmar 2024-09-06 10:59:22 , 6 min readThe Law of Diminishing Marginal Utility is an economic principle that states as a person consumes more units of a good or service, the additional satisfaction or utility they derive from each additional unit will eventually decrease.
Marginal utility is the additional satisfaction or value that a person derives from consuming one additional unit of a good or service.
The Law of Diminishing Marginal Utility helps explain why people are willing to pay different prices for different goods and services, and why people may choose to consume more or less of a good depending on its price and their budget.
Yes, the Law of Diminishing Marginal Utility can be applied to any good or service that a person consumes, including food, clothing, electronics, and more.
The assumptions of the Law of Diminishing Marginal Utility include that the consumer has a fixed budget, the good being consumed is homogeneous, and the consumer’s preferences remain constant.
The Law of Diminishing Marginal Utility may not apply to addictive substances or hobbies, as the marginal utility of each additional unit may not decrease for an addict or enthusiast.
Yes, the Law of Diminishing Marginal Utility can be violated if the assumptions made by the law do not hold for a certain situation, such as if a consumer makes an irrational decision or there are intervals between the consumption of units of a good.
Businesses can use the Law of Diminishing Marginal Utility to set prices by understanding that consumers are willing to pay more for the first few units of a good or service, but their willingness to pay will decrease as they consume more units.
Can the Law of Diminishing Marginal Utility be applied to services?
While the Law of Diminishing Marginal Utility is a widely accepted economic principle, it may not apply universally to all situations and contexts, and there may be exceptions and limitations to its application.