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Diminishing Marginal Utility

Diminishing Marginal Utility

The field of microeconomics, often concentrates on human psychology and behavior of mankind regarding consumption and spending. Diminishing marginal utility, is one such excellent hypothesis and conception, that is applicable to a majority of goods and services that are used by us.
BusinessZeal Staff
Microeconomics basically deals in individual concepts such as consumer's demand, producer's supply, factors of production, etc. One of the major phenomena that is targeted by microeconomists, is the behavior of consumers, which in economic terms is also known as 'demand'. Factors such as income of consumers, spending psychology, and alternative resources to satisfy needs are also targeted.

The principle of diminishing marginal utility, is based upon three important psychological and economic concepts: consumption, utility, and satisfaction. These are based upon the platform of 'marginalist theory' and 'paradox of value theory', and were developed and explained by classical economist Adam Smith (who authored the famous book Wealth of Nations). Many classical and neoclassical economists, refined and propagated this 'paradox', which has evolved to what we today know as the Law of Diminishing Marginal Utility. Credit for development of the three basic laws of economics, namely, Law of Demand, Law of Supply, and Law of Diminishing Marginal Utility (which are the platforms of almost all economic concepts that we use today) goes to the neoclassical economists- David Ricardo, Friedrich Von Wieser, and Alfred Marshall. These consumption theories, that have been formed to solve the problem of scarcity, have evolved from the times of Aristotle to the modern era.

What is Utility?

It is human nature to demand things to satisfy needs. The satisfaction that a person gets after consuming or using a specific commodity, is often termed as utility. The drawback of the usage of this term, is that it is not measurable with the help of any numerical unit. In cases where a commodity is to be used, such as a cell phone, it is measured in accordance with usefulness. In cases where consumption is present, it is observed in conformity with satisfaction after consumption. Thus, utility is quite a time bound, relative, and an abstract concept that depends upon the satisfaction and usefulness, that is felt after the consumption of successive commodities.

What is Diminishing Marginal Utility?

Adam Smith and Alfred Marshall were one of the first people, who pointed out to the psychology of diminishing utility. According to this concept, utility can be segregated into two different dimensions, namely total and marginal utility.
  • Total Utility: It basically denotes the amount of utility that is derived by the consumer from all the stages of consumption, and it goes on increasing after successive consumption of units.
  • Marginal Utility: It is more relative, as it indicates the utility that is derived upon the time-bound successive consumption of congruent units.
The accompanying graph is a small illustration, of the phenomenon of diminishing utility.

The Law Explained

The law states that "...under normal conditions, the marginal utility that is derived from the successive consumption of units goes on decreasing after a point of satiety, while the total utility goes on increasing at a diminishing rate, after the point of satiety is achieved...". The diminishing marginal utility of income, is one of the most apt examples of utility that decreases for non-consumption (income is earned, and not consumed).

It can be concluded, that this law is applicable to all consumer goods and services. However, as a way of life, it is always better to adopt the utilitarianism mode of the consequentialism school of thought (propagated by Jeremy Bentham and John Stuart Mill), as it targets balancing wants and resources that are available to fulfill them.