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Law of Diminishing Marginal Utility (Simple Explanation), Study notes of Economics

Law of Diminishing Marginal Utility (Simple Explanation)

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2024/2025

Uploaded on 12/23/2024

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Law of Diminishing Marginal Utility
The Law of Diminishing Marginal Utility is a fundamental concept in economics that explains
how the additional satisfaction (utility) gained from consuming one more unit of a good
decreases as more of the good is consumed.
Definition
As a consumer consumes more units of a good or service, the additional satisfaction derived
from each successive unit decreases, assuming all other factors remain constant.
Key Points
1. Utility: The satisfaction or pleasure derived from consuming a good or service.
2. Total Utility (TU): The total satisfaction obtained from consuming all units of a good.
3. Marginal Utility (MU): The additional utility gained from consuming one more unit of a
good.
Example
Imagine eating slices of pizza:
The first slice gives you a lot of satisfaction.
The second slice is enjoyable but less satisfying than the first.
By the third or fourth slice, the additional enjoyment might be minimal or even negative
(you might feel full or uncomfortable).
This decrease in satisfaction with each additional slice illustrates the law of diminishing marginal
utility.
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Law of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility is a fundamental concept in economics that explains how the additional satisfaction (utility) gained from consuming one more unit of a good decreases as more of the good is consumed.

Definition

As a consumer consumes more units of a good or service, the additional satisfaction derived from each successive unit decreases, assuming all other factors remain constant.

Key Points

  1. Utility: The satisfaction or pleasure derived from consuming a good or service.
  2. Total Utility (TU): The total satisfaction obtained from consuming all units of a good.
  3. Marginal Utility (MU): The additional utility gained from consuming one more unit of a good.

Example

Imagine eating slices of pizza: ● The first slice gives you a lot of satisfaction. ● The second slice is enjoyable but less satisfying than the first. ● By the third or fourth slice , the additional enjoyment might be minimal or even negative (you might feel full or uncomfortable). This decrease in satisfaction with each additional slice illustrates the law of diminishing marginal utility.

Assumptions

  1. Rational Behaviour: Consumers act rationally to maximize satisfaction.
  2. Homogeneous Units: Each unit of the good is identical.
  3. Continuity: Consumption occurs without long gaps between units.
  4. No Change in Consumer Preferences: Other conditions like taste, income, and prices remain constant.

Importance in Economics

  1. Basis of Demand Curve: Explains why demand curves slope downward (as utility decreases, consumers are willing to pay less).
  2. Optimal Consumption: Helps in determining how much of a good a consumer will purchase.
  3. Pricing Strategies: Businesses use it to price products effectively, such as offering discounts on bulk purchases.

Graphical Representation

The graph of marginal utility typically slopes downward, reflecting the decrease in additional satisfaction as consumption increases.

Limitations

  1. Subjective Nature of Utility: Utility is not directly measurable.
  2. Exceptions: Some goods, like addictive products, may not follow this law.
  3. Unrealistic Assumptions: Perfect homogeneity and unchanged preferences are rare in real-world scenarios.