Law of
Diminishing
Marginal
Utility
UTILITY & MARGINAL UTILITY
UTILITY & MARGINAL
UTILITY
Consumer buys more of a thing at lower price as
the UTILITY rises
Utility – Level of happiness and satisfaction arising
from the consumption of a good/ service
TOTAL UTILITY
The satisfaction received from consumption of a
given number of units at a given time period
MARGINAL UTILITY
The additional utility derived from the
consumption of one more unit of a good
◦ 10 units of satisfaction from the consumption of one unit
of a good
◦ 15 units of satisfaction from the consumption of second
unit of the same good
◦ Marginal Utility is 5
THE MARGINAL UTILITY GAINED FROM THE
CONSUMPTION OF A PRODUCT TENDS TO FALL AS
CONSUMPTION INCREASES
MARGINAL UTILITY
Quantity Consumed Total Utility Marginal Utility
0 0
1 20
2 35
3 45
4 53
5 58
6 54
7 48
MARGINAL UTILITY
Quantity Consumed Total Utility Marginal Utility
0 0 -
1 20 20
2 35 15
3 45 10
4 53 8
5 58 5
6 54 -4
7 48 -6
MARGINAL UTILITY
Chart Title
70
60
50
40
30
20
10
0
0 1 2 3 4 5 6 7
-10
Utility Marginal Utility Column1
MARGINAL UTILITY
(Water)
Quantity Consumed Total Utility Marginal Utility
0 0
1 10
2 18
3 24
4 28
5 30
6 30
7 28
LAW OF DIMINISHING
MARGINAL UTILITY
The more you have – the less you want it
Fall in marginal utility as consumption increases
As consumption increases , there may actually come a
point where Marginal Utility is negative
Dissatisfaction – Disutility
LAW OF DIMINISHING
MARGINAL UTILITY
Consumers have limited income
Consumer behave rationally
Tries to maximize the total utility
A consumer is said to be in equilibrium when
◦ At a given income
◦ Not possible to switch expenditure from product to B
◦ to increase total utility
Equimarginal Principle/ Law
of Maximum Satisfaction/
Law of Substitution
Presented in 19th century by an Australian economists H. H.
Gossen
Also known as Law of Maximum Satisfaction or Law of
Substitution
http
://[Link]/micro/law_of_equi_marginal_utili
[Link]
Assumptions of the
Law of Equi Marginal
Utility:
1. There is no change in the prices of the goods.
2. The income of consumer is fixed.
3. The marginal utility of money is constant.
4. Consumer has perfect knowledge of utility obtained from goods.
5. Consumer is normal person so he tries to seek maximum satisfaction.
6. The utility is measurable in cardinal terms.
7. Consumer has many wants.
8. The goods have substitutes
Explanation of the
Law of Equi Marginal
Utility:
Consumer has number of wants
Tries to spend limited income on different things in such a way that
marginal utility of all things is equal.
When he buys several things with given money income he equalizes
marginal utilities of all such things.
The law of equi-marginal utility is an extension of the
law of diminishing marginal utility.
The consumer can get maximum utility by allocating income among
commodities in such a way that last dollar spent on each item provides
the same marginal utility.
Explanation of the
Law of Equi Marginal
Utility:
Consumer maximize their utility where their marginal valuation from
each product consumed is the same
"A person can get maximum utility with his given income when it is
spent on different commodities in such a way that the marginal utility
of money spent on last unit of each item is equal".
He should purchase such amount of each commodity that the last unit
of money spend on each item provides same marginal utility.
Explanation of the
Law of Equi Marginal
Utility:
MUA / PA = MUB / PB = MUC / PC … = MUN / PN
Where MU is the Marginal Utility
P is the price
A, B, C and N are different products
If Marginal Utility is 10 units of Product A at Price $5
Equivalent to Consuming 20 units of Product B at Price 10
Possible to use Marginal Utility to derive an individual demand curve
Increase in Price leads to a reduction in its demand
Explanation of the
Law of Equi Marginal
Utility:
The value of MA/PA will now fall
MU of A per dollar will now be less than B and C
The consumer will reduce the spending on A and increase on B and C
This will reduce the Marginal Utility of B and C
The demand curve for A will slope downwards
Explanation of the
Law of Equi Marginal
Utility:
Money Units MU of Apples MU of Bananas
1 10 8
2 9 7
3 8 6
4 7 5
5 6 4
6 5 3
Explanation of the
Law of Equi Marginal
Utility:
CALCULATION:
The above schedule shows that consumer can spend six dollars in different ways:
$1 on apples and $5 on bananas. The total utility he can get is:
[(10) + (8+7+6+5+4)] = 40.
$2 on apples and $4 on bananas. The total utility he can get is:
[(10+9) + (8+7+6+5)] = 45.
$3 on apples and $3 on bananas. The total utility he can get is:
[(10+9+8) + (8+7+6)] = 48.
$4 on apples and $2 on bananas. This way the total utility is:
[(10+9+8+7) + (8+7)] = 49.
$5 on apples and $1 on bananas. The total utility he can get is:
[(10+9+8+7+6) + (8)] = 48.
ARE CONSUMERS
RATIONAL?
•Assumption of Law of Diminishing Marginal Utility – Consumer acts and
behaves in a rational way
•There are factors that affect rationality/ purchasing decisions
•Psychological influences
◦ Special Offers – Impulsive cognitive response to buy
◦ Where payment can be deferred – Consumer purchase beyond their ability
to pay
◦ Emotionally attached to the brand – influences consumption – I phones
•Behavioral Economic Models explore why consumer make irrational
decisions
•If consumer was rational 100% - no need for marketing
MUa/Pa = Mub/Pb
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