Law of Diminishing Marginal Utility

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One of the main principles behind mainstream, neoclassical economic theory, is that individuals act to maximize their utility. Utility is generally defined as a satisfaction (pleasure) that an individual derives from consuming or using a specific good or service. Total utility indicates the total amount of satisfaction or pleasure an individual derives from consuming some specific quantity of a good or service. Marginal utility refers to the additional satisfaction a consumer gets from an additional unit of a good or service she/he consumes during a given period of time.
The law of diminishing marginal utility states that as an individual consumes more units of a specific good or service, the additional utility the consumer derives from the successive units diminishes over time. Thus diminishing marginal utility explains a lot about consumer behavior in the market economy.
• Select a specific consumer behavior and construct a “mini case study” that highlights the workings of marginal utility and how it affects the consumption pattern for goods and services.
• Explain the roles total utility and marginal utility play to understand change in the consumer’s behavior and preferences.
• Does the law of diminishing marginal utility hold for all goods and services we buy and consume? What are the exceptions?

 

 

Sample Solution

The law of diminishing marginal utility is one of the vital laws of economics. The law represents the fundamental tendency of human behavior. According to the law, when a consumer increases the consumption of a good, there is a decline in MU derived from each successive unit of that good, while keeping the consumption of other goods constant. The law of diminishing marginal utility states that as more and more of goods are consumed, the utility derived from them falls. However, there is an exception to this law. It is observed that a consumer sometimes gain more utility as more and more of a good is consumed.

 

 

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