Diminishing Marginal Utility - Explained
What is Diminishing Marginal Utility?
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What is Diminishing Marginal Utility?
The law of Diminishing Marginal Utility is an economic concept. It applies to when a particular commodity is consumed. Consumption of a commodity produces a benefit; but, as consumption grows, the benefit from consuming an additional or higher volume of a commodity goes down. The word utility is used to represent the benefits of consumption.
What is Diminishing Marginal Utility Important?
Marginal utility means an extra total utility which one gets by spending one unit more on the same thing. When we increase the consumption of some commodity, the marginal utility of that commodity goes on decreasing, i.e. the amount of satisfaction gained from an additional unit of that commodity decreases. To explain this economic law, we show the demand curve sloping down. With the increase in the use of a thing, the intensity of want goes down. Hence, the utility gained from the extra unit goes down as well.In the finance market, according to an economist named Marshall, the extra benefit an individual gets from a given rise in his stock diminishes with every subsequent rise in stock.
Assumptions about Law of Diminishing Marginal Utility
For the Law of Diminishing Marginal Utility (DMU), we assume some aspects of life such as:
- All units of a thing must be similar in all aspects. (In the above example, all pieces of bread are same in taste, color, size, freshness, etc.)
- We take a standard unit for the thing. (A piece of bread is taken as a standard unit in the example)
- The taste of a man does not change while consuming a commodity. (Man does not suffer from any disease that can change the taste of bread).
- The man consumes a particular thing continuously, means without any gaps or intervals. (The man eats bread continuously, i.e. one after another. He does not stop eating and start after a break).
The substitute commodities remain at the same price as before. (Theres no decrease in the price of flour, loaf, pizza or any other item which can be a substitute of bread, otherwise, he may leave the bread and buy cheaper alternative).The Law of Diminishing Marginal Utility is very important in deriving many other concepts of economics such as (I) It acts as a base to the Law of Demand.(II) It is a base to the Consumption Expenditure (III) This Law is a base for the Progressive Taxation
- Total Utility (Economics)
- Efficiency Principle
- Indifference Curve
- Time Preference Theory of Interest
- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
- Economic Efficiency
- Efficiency Theory
- Productive Efficiency
- Capacity Utilization Rate
- Pareto Efficient
- Comparative Advantage
- Criticisms of the Economic Approach
- Behavioral Economics
- Normative Economics
- Positive Economics
- Invisible Hand
- Sunk cost