Diminishing UTILITY

Marginal utility. In economics, the concept of utility refers to the satisfaction or benefit derived from consuming a good or service. The principle of diminishing utility, also known as the law of diminishing marginal utility, states that as the consumption of a good or service increases, the additional utility or satisfaction derived from each additional unit of the good or service decreases. In other words, the more you consume of a particular good or service, the less satisfaction you derive from each additional unit. This principle is fundamental to understanding consumer behaviour, and it has important implications for pricing, marketing, and public policy.

This blog post will explore the concept of diminishing utility in depth. We will start by defining the concept and discussing its origins. Then we will examine the relationship between utility and marginal utility, and we will explain how diminishing marginal utility is related to the law of demand. After that, we will look at some practical examples of diminishing utility in action, such as the consumption of food and drink. Finally, we will consider the implications of the principle of diminishing utility for public policy, particularly in the areas of taxation and redistribution.

The Concept of Diminishing Utility

The concept of utility is a central idea in economics. It refers to the satisfaction or benefit that a consumer derives from consuming a good or service. The concept of utility is subjective and varies from person to person. For example, some people might derive more utility from consuming chocolate than others, while some might prefer vanilla ice cream.

The principle of diminishing utility is based on the idea that as the consumption of a particular good or service increases, the additional utility or satisfaction derived from each additional unit of the good or service decreases. In other words, the more you consume a particular good or service, the less satisfaction you derive from each additional unit.

The principle of diminishing utility is often illustrated with the example of a person eating a pizza. The first slice of pizza might be very satisfying, but the second slice might be slightly less satisfying. By the time the person has eaten the third or fourth slice, the satisfaction derived from each additional slice is likely to be much lower. Eventually, the person might reach a point where they are no longer enjoying the pizza at all, and they might even feel sick if they try to eat any more.

The principle of diminishing utility applies to all goods and services, not just pizza. For example, a person might derive a lot of satisfaction from owning a new car, but the satisfaction they derive from each additional car they own is likely to decrease. Similarly, a person might derive a lot of satisfaction from going on a vacation, but the satisfaction they derive from each additional vacation is likely to decrease.

Origins of the Principle of Diminishing Utility

The principle of diminishing utility can be traced back to the early economists of the 18th and 19th centuries, including Jeremy Bentham, William Stanley Jevons, and Carl Menger. These economists were interested in understanding how consumers make choices about what goods and services to consume.

One of the key insights of these early economists was that consumers face trade-offs when they decide what to consume. For example, if a consumer chooses to spend money on one good or service, they have less money to spend on other goods or services. Similarly, if a consumer chooses to consume more of one good or service, they have less time and resources to consume other goods or services.

The early economists recognized that consumers make decisions based on the marginal utility of each additional unit of a good or service. Marginal utility refers to the additional utility or satisfaction derived from consuming one additional unit of a good or service. For example, if a person derives 10 units of utility from the first slice of pizza and 8 units of utility from the second slice of pizza, the marginal utility of the second slice is 8 units.

The law of diminishing marginal utility states that as a consumer consumes successive units of a commodity, a point is eventually reached where consumption of an additional unit yields less satisfaction

In other words, it states that satisfaction derived from consuming successive units of a commodity will diminish as the
consumption of the commodity increases, is, the total utility increases as more commodity is consumed but increases at a diminishing rate.

The concept of diminishing marginal holds that as additional units of a commodity are consumed, less and less satisfaction is added to total utility and later adds nothing to total utility and later adds nothing to total utility.

 Further consumption leads to negative values, then total utility diminishes as reflected in the total
utility curve dropping downwards.

For example, a person just coming to sunny, hot weather will definitely need some cups of cold water to quench his thirst. The first three, four may give him maximum satisfaction.

 After that, decreases in satisfaction sets more and more cups of water are consumed until he/she is in a position not to consume anymore. The satisfaction or utility derived from cold in this regard diminishes as the consumption of water from a certain point increases.

The law of diminishing marginal utility can be demonstrated with the aid of a table or schedule.

Table or schedule demonstrating the law of diminishing marginal utility.

No. of cups of cold water consumedTotal utilityAverage utilityMarginal utility
1 2 3 4 5 6 79 16 24 30 34 36 369 8 8 7.5 6.8 6 5.1– 9 8 6 4 2 0

 

CRITICISM OF THE LAW OF DIMINISHING MARGINAL UTILITY

The law of diminishing marginal utility has been largely criticised on the basis of its assumptions,

of the assumptions are not realistic.

  • The assumption that all commodities are divisible into small units is unrealistic. Houses, cars, etc are in large forms and cannot be divided into small units. So their supply cannot be in small units but in whole units.
  • Due to the influence of habit and impulse, people do not always weigh the marginal utility of commodities before purchasing them. So, the assumption that people must weigh the marginal utility to be derived from any commodity before purchasing it is not true.
  •  The law of diminishing marginal utility does not start operating as soon as consumption is increased. Before the point of origin is reached, the marginal utility has increased.
  • It is not always true that marginal utility decreases with increased consumption of a commodity. Certain commodities, when consumed, will lead to a corresponding increase in their demand, e.g. money, precious stones and jewellery.
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