Law of Diminishing Marginal Utility Definition, Examples

07 Jun Law of Diminishing Marginal Utility Definition, Examples

So the consumption of more and more apples bring less and less utility for the consumer. Marginal utility is the change in the utility derived from consuming another unit of a good. If you have understood marginal utility analysis, then you law of diminishing marginal utility states will be able to denote the correlation between total utility and marginal utility. The total utility can rise although if the marginal utility decreases.If the total utility has reached the maximum value, marginal utility is equal to zero.

If there is a substantial break between two consumptions, the utility derived from them may not be considered a marginal utility. In fact, a gap of a long time changes the desirability of the good which has to be consumed. Therefore, when a long gap is there between two successive cases of consumption, the law of diminishing marginal utility cannot be implemented.

For example, prices and quantum of related goods also affect the utility of a commodity. The utility of a commodity is based on the nature of a consumer. The subjectivity of a consumer is also affected by several factors like time, country, taste, fashion and environment. By the law, value in use in case of air, water, etc., is greater than the value in exchange of diamond, and other valuables. Water and air are in plenty and on account of it their marginal utility is low and the value in exchange is also low.

Exceptions for the Law of Diminishing Marginal Utility:

It is, therefore, advisable that their surplus wealth be acquired by the state and distributed to the poor who possess high marginal utility for money. The famous “diamond-water paradox” of Smith can be explained with the help of this law. Because of their relative scarcity, diamonds possess high marginal utility and so a high price. Since water is relatively abundant, it possesses low marginal utility and hence low price even though its total utility is high. That is why water has low price as compared to a diamond though it is more useful than the latter. If he is under the influence of an intoxicant, say wine or opium, the utility of the latter units will rise.

As the utility of a product decreases as its consumption increases, consumers are willing to pay smaller dollar amounts for more of the product. For example, assume an individual pays $100 for a vacuum cleaner. Because he has little value for a second vacuum cleaner, the same individual is willing to pay only $20 for a second vacuum cleaner. Human wants are unlimited and the resources are scarce with alternative uses. A particular want can be satisfied on a particular point of time.

Portion below the x-axis indicates the negative marginal utility. However, when the cups of tea consumed per day increase to seven, then instead of giving positive marginal utility, the seventh cup gives negative marginal utility equal to -2. This is because too many cups of tea consumed per day may cause him acidity and gas trouble. Thus, the extra cups of tea beyond six to the individual in question give him disutility rather than positive satisfaction. It is obvious from the above that the law of diminishing marginal utility describes a familiar and fundamental tendency of human nature.

Law of Diminishing Marginal Utility – Detailed Explanation

The law of diminishing marginal utility also provides the basis for the distribution of wealth in a socialist economy. Wealth is transferred from rich to the poor so the marginal utility of money will increase which is low for rich people. The law will operate when the price of the commodity under consumption and its related goods do not change. If there is change in the price of either the commodity or its related goods, the marginal utility of additional unit will increase and the law will not operate. The law will operate when the income, habit, taste and preference of the consumer do not undergo change while consuming the different units of a commodity. If these variables change the additional units of the commodity will give more utility.

• Such a “psychological law,” which for some as Jevons is explained by purely psychological reasons, has been called the law of diminishing marginal utility.
• Thus, the first unit that is consumed satisfies the consumer’s greatest need.
• Similarly, when we consumed the 5th apple, we are at our saturation point.
• In such a case, on a 10-point scale, he would give ten points.

There should be no change in the tastes, habits, customs, fashions and income of the consumer. A change in any one of them will increase rather than diminish utility. Assumes that utility of consumers also depends on possessions already owned by them. For example, a consumer is suffering from diabetes, thus, he is not allowed to consume sugar that he/she already possesses. In such a case, the utility of coffee derived by him/her would be less. Implies that the tastes and preferences of consumers must remain same during the consumption period.

Correlation Between Total Utility and Marginal Utility

Implies that the law of diminishing marginal utility is violated in case of hobbies of an individual, such as stamp collection and coin collection. This is because an individual derives more and more utility from additional unit gained from a hobby item. For instance, a level of satisfaction increases when a new variety https://1investing.in/ of stamps or coins are received. However, the utility diminishes if the same variety of stamps or coins is gained every time. Suppose you have come home from outside and are very thirsty, and your mother offers you a glass of juice. The satisfaction with the second glass of juice will be relatively lesser.

The law of diminishing marginal utility is one that occurs as a result of the declining value of an asset in comparison with other assets. It incorporates a new unit of that good and is known by the name of marginal utility. When he consumes 4th unit of orange the marginal utility becomes zero, which is called the point of satiety. Similarly, from the consumption of 5th and 6th units of orange, the marginal utility becomes negative, i.e., he gets disutility instead of utility from these units of consumption. No doubt the marginal utility of money does not become zero, but it definitely falls as a person acquires more and more money. The marginal utility of money for a rich man is less while it is high for a poor man.

However, in an increasingly smaller proportion, until a time comes when consuming more units of said Good will cause a discomfort. Thus, the table shows that a consumer consumes more and more units of a commodity at a certain period of time, the marginal utility declines, becomes zero and even negative. As per the definitions, we can conclude that, if the consumer consumes goods continuously, the utility obtained from every successive unit goes on diminishing. If the consumer is consuming the goods continuously, firstly he reaches the point of maximum satisfaction which is known as level of satiety. If he continues to consume the goods again, the utility obtained from that particular goods goes in negative aspect or he gets inutility. We have graphically represented the data of the above table in Figure 3.

The satisfaction derived from second consumption is less than the satisfaction gained by first consumption. The marginal utility thus goes on decreasing with consumption of each additional consumption. With the increase in the surplus of a commodity the marginal utility of that commodity will decline. This law is the basis for the theory of pricing of various goods and services in the economy. Addictions/Hobbies – This law does not hold in the case of addictions. The marginal utility of having an additional glass of alcohol does not decrease for an alcoholic.

Diminishing Marginal Utility Law

The amount of satisfaction gained by John from a plate of food is directly proportional to John’s hunger level. Therefore, the first plate of food will give John more satisfaction than the second plate of food, which in turn will give John more satisfaction than the third plate of food. For example, giving water to a thirsty man by spoon will increase the utility of the successive spoon of water. The consumer’s income, preference, taste and fashion should not be changed while consuming the goods. Giving water to a thirsty person by spoons will increase the utility of the subsequent spoons of water.

In Figure-2, it can be seen that TU curve increases with an increase in number of units of good X. It reaches the saturation point when maximum level of 35 utils is achieved. In Figure-2, MU curve is decreasing as consumption of good X is increasing. At fifth unit, where TU is maximum, MU reaches zero and becomes negative. This law applies to all kinds of consumer goods, such as durable and non-durable goods.

The law of diminishing marginal utility is a universally applicable law. It has theoretical as well as practical importance in economic analysis. The law will not apply to those goods and services whose consumers’ or users’ number is increasing. For example, the numbers of telephone connections are increasing day-by-day and the utility is increasing instead of decreasing in practical life. The law of diminishing marginal utility operates only when other things remain same as pointed by Prof. Alfred Marshall. The law will operate only when the consumption of various units of a commodity is done for satisfying a single want.