Definition of the Law of Diminishing Marginal Utility
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Definition of the Law of Diminishing Marginal Utility

Definition of the Law of Diminishing Marginal Utility The Law of Diminishing Marginal Utility states the experience of individual customer. In the beginning when a consumer starts consuming a commodity, his want is urgent and the consumption of the commodity gives him immense satisfaction. But as the consumption proceeds, the satisfaction he derives from the consumption of the commodity diminishes progressively. The reason behind it is because the first unit met the urgent requirement of the consumer but by the time the second unit of the commodity is taken the edge of the want has been blunted.

Definition of the Law of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility states the experience of individual customer. In the beginning when a consumer starts consuming a commodity, his want is urgent and the consumption of the commodity gives him immense satisfaction. But as the consumption proceeds, the satisfaction he derives from the consumption of the commodity diminishes progressively. The reason behind it is because the first unit met the urgent requirement of the consumer but by the time the second unit of the commodity is taken the edge of the want has been blunted.

Examples of the Law of Diminishing Marginal Utility

Suppose a person starts eating bananas one after the other. The first banana gives him great pleasure but by the time the person consumes the second banana the edge of his appetite has been reached and as such the second banana will yield less satisfaction. The level of satisfaction will keep diminishing with additional consumption of the banana. The satisfaction level goes on diminishing until it drops down to zero where the utility of the commodity is nil and any additional consumption will change into misutility. At this level we don’t want to have any more of the commodity.

While understanding the Law of Diminishing Marginal Utility it is necessary to emphasize that it is the marginal utility which diminishes and not the total utility. The total utility of the commodity increases but at a diminishing rate.

Total utility is the total of the utilities of all the units consumed. On the contrary, marginal utility is the addition made to the total utility by the consumption of the last unit which one considers just worthwhile.

When a person is consuming a commodity, he consciously or unconsciously goes on comparing the utility of the unit that he purchases and the price that he pays for it. At first the utility is much higher than the prices. But when he goes on consuming the successive units, the utility goes on decreasing. So long as utility is greater than the price of each unit, he will go on consuming more and more units. This will bring him to a stage when the utility will fall exactly to the level of the price that he pays. This is the point of marginal utility. Here the satisfaction derived and the prices paid are just equal to each other. The marginal units are just worth our while to purchase and to consume.

The price of a commodity does not depend on the total utility; it rather corresponds to the marginal utility. Total utility of air is infinite. But we pay nothing for air, since its marginal utility is zero. Thus price measures marginal utility and not the total utility. The total utility is maximum when marginal utility is zero.

 

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