Suppose your mother offers you food after you just got home from work. As you consume more, you will reach a point where you will need another chapatti where the marginal utility will be zero. After that, if you are forced to eat even one more chapatti, it will lead to disutility. The Law of Diminishing Marginal Utility causes such a decrease in satisfaction with successive unit consumption. Marginal utility is the amount of additional satisfaction that a consumer gets from having one more unit of a good or service.
The Budget Constraint
Therefore, the first unit of consumption for any product is typically highest. After that, every unit of consumption to follow holds less and less utility. A college student, Ramón Juárez, often purchases candy bars or bags of potato chips between classes; he tries to limit his spending on these snacks to law of diminishing marginal utility given by $8 per week.
Paradox of water and diamonds
According to the Law of Diminishing Marginal Utility (DMU), with the consumption of more and more units of a commodity, the utility obtained from each successive unit decreases. Most consumers spread their income among different varieties of goods when making choices. People prefer a variety of goods as consuming more and more of any one good diminishes the marginal satisfaction obtained from continued use of that good. This law explains a significant relationship between utility and the quantity of a commodity that is consumed. This can be better understood by using the example mentioned below. Panel (a) of Figure 7.1 “Total Utility and Marginal Utility Curves” shows the total utility Henry Higgins obtains from attending movies.
J. Zane used to stop at his favorite coffee kiosk to buy a $2 cup of coffee as he headed off to work on Interstate 15 in the San Diego area. Since 1996, an experiment in road pricing has caused him and others to change their ways—and to raise their total utility. When we speak of maximizing utility, then, we are speaking of the maximization of something we cannot measure. We assume, however, that each consumer acts as if he or she can measure utility and arranges consumption so that the utility gained is as high as possible. Utility is subjective and challenging to measure directly, but economists use it as a theoretical framework to analyze consumer preferences and behaviors.
Assumptions of Marginal Utility Analysis
Marginal utility is calculated by dividing the change in total utility by the total change in the number of units consumed. The price and quantity demanded are inversely related, which represents the fundamental law of demand in consumer choice theory. This can help businesses set the prices for their goods and services to encourage consumers to return. What this example illustrates is the way that marginal utility keeps decreasing as a buyer makes more and more purchases.
For instance, you might buy a sandwich, which you’re willing to pay $10 for. The Law of Diminishing Marginal Utility illustrates that with each successive unit, the person consumes of a good or service, additional satisfaction derived by each unit will eventually decline. That is, the first slice of pizza might be a heaven of satisfaction, but when the quantity consumed increases to four slices or five slices, satisfaction from another slice starts to diminish. The law of diminishing marginal utility helps explain why consumers are generally less and less satisfied with each additional unit of a product that they consume.
The utility goes on diminishing with the consumption of every successive glass water till it drops down to zero. It is the position of consumer�s equilibrium or maximum satisfaction. If the consumer is forced further to take a glass of water, it leads to disutility causing total utility to decline.
In the figure (2.2), along OX we measure units of a commodity consumed and along OY is shown the marginal utility derived from them. The marginal utility of the first glass of water is called initial utility. The utility curve MM/ falls left from left down to the right showing that the marginal utility of the success units of glasses of water is falling.
- In simple words, whereas the first few units of consumption bring substantial pleasure, the marginal increase in the benefit of every subsequent unit decreases progressively.
- So, the amount of money that you are willing to spend for a unit of commodity rather than going without it is the measure of utility that you derive from the said commodity.
- For example, if a car manufacturer has an SUV that is already a top seller, they can create trim levels with additional features or upgrades.
- Many people only need one; there is an extremely large jump in utility from owning zero cell phones to owning one cell phone.
- You reached a point at which the marginal utility of another dish was greater, and you switched to that.
The second assumption is that when you are spending money on a commodity, the marginal utility of money remains constant throughout. This facilitates the measurement of the utility of commodities in terms of money. If a person has a good or service that has less value to them compared to another good or service they could trade it for, it would be beneficial for them to make that trade. The marginal gains or losses from further trades will vary as items are exchanged. If the marginal utility of one item is decreasing while the other is not increasing, then the individual will demand a greater amount of the item they’re acquiring in comparison to the one they’re giving up.
Chapter 6: Concepts of Cost and Revenue
The rate of increase is given by the slope of the total utility curve, which is reported in Panel (a) of Figure 7.1 “Total Utility and Marginal Utility Curves” as well. The slope of the curve between 0 movies and 1 movie is 36 because utility rises by this amount when Mr. Higgins sees his first movie in the month. It is 28 between 1 and 2 movies, 22 between 2 and 3, and so on. The slope between 6 and 7 movies is zero; the total utility curve between these two quantities is horizontal.
This concept is helpful for explaining the principles of supply and demand, and is essential aspects of models of imperfect competition. Some units may have zero marginal utility for the second unit consumed. For example, if you already own a copy of a magazine, there’s no utility in owning a second copy. In these situations, the marginal utility has decreased 100% between units. This is an important concept for companies that have a diverse product mix. If the shop only marketed a single product, consumers would likely grow tired of that product; its marginal utility would diminish.
