The Law of Diminishing Marginal Utility
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RESEARCH PAPER
THE LAW OF DIMINISHING MARGINAL UTILITY
In Economics, Supply and demand curves explain how a market functions. The demand curve slopes downwards and the supply curve slopes upwards. Both the curves cut each other at a point known as Equilibrium point. These curves provide the guidance to analyze the price trends of commodities in a market. These curves are based on the combined demands of all consumers in a market. To understand the market more, it requires understanding the demand patterns of individual consumers. How a consumer takes decisions in purchasing commodities has a significant role in understanding the functioning of a market. The total utility, marginal utility and law of diminishing utility are the concepts of microeconomics which explain the economic behavior of an individual consumer.
The Law of diminishing marginal utility says that the marginal utility of each additional unit of a commodity declines with increase in the quantity consumed. This principle also explains that the determination of price depends upon the marginal utility but not on the total utility of that commodity. This concept provides solution for why certain commodities though having high utility for the consumers are cheap compared to the commodities which are having low utility. If a commodity has high marginal utility, its price would be high. Whereas if a commodity has a low marginal utility, its price would be low. This paper attempts to explain the concepts of total, marginal utility, law of diminishing marginal utility and optimum purchase rule. This optimum purchase rule analyses what decisions are opt for the consumers with regard to how much of a commodity they shall buy and at what price?
Total utility and Marginal utility:-
Utility means benefit or satisfaction. A purchaser buys a commodity because it has some utility for him. This utility is a personal satisfaction which a purchaser obtains in purchasing a product. Daily, millions of consumers take millions of decisions. A purchaser wants to decide whether to go to movie or to purchase a ticket. Another one wants to decide whether to purchase an additional kilo gram of bananas or to purchase biscuits for his son. How purchasers arrive at a decision when they are required to take a decision in a particular situation. What factors influence the purchasers in taking decisions? Economists have constructed a concept total utility and marginal utility to determine what decisions are opt and what decisions are not opt for the consumers.
Total utility :- Total utility of a quantity of goods is generally understood as maximum amount of money he or she is willing to give in exchange for it. Suppose a purchaser wants to purchase a kilo gram of laddus. For this, he is ready to pay not more than 100 Rupees. So, total utility of one kilo gram of laddus for that purchaser is 100 Rupees. The total utility of first unit of any commodity and its marginal utility are same. Total utility increases with increase in the quantity of commodities consumed whereas the marginal utility decreases with increase in the quantity of commodities consumed. The graph of total utility slopes upwards.
Marginal utility: – The term Marginal in economics is extremely important in Economics. It means extra or additional. The marginal utility of a quantity of commodity is generally understood as the maximum amount of money a purchaser is willing to pay for an additional unit of a commodity. The general rule is that more and more the consumption, less and less becomes marginal utility.
the total utility of a commodity increases with the increase in consumption till it reaches the point of satiety after which total utility remains constant. At the same time, marginal utility of a commodity decreases with the decrease in consumption. The total utility of first unit of a commodity is equal to its marginal utility. With each additional unit, the marginal utility of a commodity declines and at the point of satiety, it becomes “Zero”.
The graph of total utility slopes upwards and reaches to a point of satiety where it runs parallel to x-axis. Whereas the marginal utility curve slopes downwards and becomes zero. So, this shows that even though the total utility of a quantity of a commodity is high, its marginal utility can be low.
Optimum purchase rule:-