Law of Diminishing Marginal Utility

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.

Law of Diminishing Marginal Utility Graph

We can see the graph of law of diminishing marginal utility, which shows that as more goods are consumed, their marginal utility decreases.

This theory is applied more in capitalist societies where the accumulation of goods are common element. Also, it allows identifying marginal utilities that diminish with the passage of time forming utility curves with negative slope.

Example 

Suppose a person who does not have shoes to go to work and decides to buy new ones. This person has a positive initial marginal utility. As you wear your shoes you will be buying more and more. Later your degree of satisfaction will be less because of the accumulation of more goods. Therefore, the marginal utility will become constant in time and then become decreasing. In a capitalist society, this theory is very common since society tends to accumulate and oblivion of many goods that are purchased.

Another example can be found i.e. children are fond of toys. However, when they have more toys, they stop playing with antique toys losing their interest in playing with them. In this case, the marginal utility does not refer to a material value and their economic quantification. Hence, the marginal utility of goods for each consumer decrease when each extra unit of the goods consumed cause a smaller increase.

Diminishing Marginal Utility and Demand Curve

Assume that customers may assign a monetary value to the utility they receive from purchasing additional units of a product or service. As a result, their ability to pay for anything would be influenced by the marginal utility they get. People’s willingness to pay would also decrease if marginal returns are decreasing. As a result, the individual demand curve would be slanted downward. Most goods and services would have an inverse relationship between price and quantity requested.

Principle 

Such a “psychological law,” which for some as Jevons is explained by purely psychological reasons, has been called the law of diminishing marginal utility. In this case the word “utility” denotes satisfaction or pleasure achieved. Whereas, the adjective “marginal” underlines the fact that the utility of the last unit consumed decreases as consumption increases.

More from Business Study Notes:- Total and Marginal Utility

Thus, to give a simple example, if the consumption of an apple gives a utility of 10, that of two apples a utility of 15 and that of three apples 18. So, the marginal utility of the second apple is equal to 15-10. That is to say 5, while that of the third apple is 18-15, that is 3. Now, since 3 is less than 5, the law of decreasing marginal utility has been verified, at least in this example.

Let us emphasize that this law is not expressed by a clear formula, contrary to what happens in physics. So, it is not specified at what rate marginal utility decreases as consumption increases. Since it varies from one individual to another individual. 

Marginal Utility

Marginal Utility is a concept used in microeconomics and economic theory. It is the change in the total Utility that the Consumer experiences as a result of varying in a very small amount the Consumption of a certain Good. Although, remaining constant the Consumption of the other Goods. From the concept of Marginal Utility derives the Law of Declining Marginal Utility.

This law postulates that as an individual consumes additional units of Goods, the satisfaction or Total Utility that one obtains will increase. However, in an increasingly smaller proportion, until a time comes when consuming more units of said Good will cause a discomfort.

As an example, consider the great satisfaction of drinking a glass of cold water on a hot day, and perhaps a second glass. But after ten glasses of water we may have more discomfort than satisfaction.

Marginal Utility is the increase or decrease of total profit that accompanies the increase or decrease in the amount of goods. An example that illustrates this is the case of a thirsty person who finds a glass of water in the desert. The first glass will be extremely valued. But if you take a second glass, that valuation is going to be smaller. At last, the glass number 10 probably will not generate any pleasure, and may even cause discomfort.

Law of Diminishing Marginal Utility

Principles according to which the consumption of additional units of goods generate an additional utility or satisfaction. In other words, this law establishes the value conferred by rational consumers on the successive units of given commodity decreases progressively. 

The justification for the diminishing character of marginal utility rests on common sense. That shows the additional quantities of certain goods are consumed, the additional satisfaction they provide is less. Since the consumer is gradually being saturated.

Imagine an individual who likes cookies and offers three. When one is consumed and you continue offering one by one. So, gradually the filling and satisfaction you get with each additional cookie you eat is less.

Taken to the extreme, there will be a point at which the consumption of another biscuit could produce a unit. Precisely for that quantity the total utility function will have reached its maximum. So, the marginal utility begins to be not only decreasing but negative. It is interesting to compare the form of the total utility curve and that of the decreasing marginal utility.

The utility derived from the last additional unit of the good consumed decreases until reaching the point X0. In this, the consumer would be saturated and one more unit would not only report less satisfaction. The decreasing rate of marginal utility is accepted as a general rule, this is a guideline that is fulfilled in most cases. However, there are situations where this can be constant at some intervals or even increasing.

For some economists, for example, money has a constant marginal utility between certain stretches. So, the marginal utility of a good stamp collector is likely to be increasing. Since the satisfaction level each time he gets a new stamp, almost unique in the world, far from diminishing increases.

Note:

The law of diminishing marginal utility is linked to the cardinal approach of the measure of satisfaction in the theory of consumer behavior.