Post on 15-Nov-2014
description
Managerial Economics
Topic : Law of diminishing marginal utility
Presented by- Lipi Neelima Singh Shashanka
Baruah Sohini Bhuwalka
What is Utility?
-Product angle: Want satisfying property of any
product (absolute).
-Consumer angle: The psychological feeling
of satisfaction or happiness or well being or
benefit derived by the consumer by the
consumption of certain units of a good or
service at a certain point of time
(subjective).
Utility can be measured in two ways:
-Cardinal Utility:Assigning numerical values to the
amount of satisfaction
-Ordinal Utility:: Not assigning numerical values to
the amount of satisfaction but indicating the order of
preferences, that is, what is preferred to what
Utility is of two types:
-Total Utility
-Marginal Utility
Total Utility
Sum of utility derived by consumer from multiple units consumed
at a point or over a period of time
Example: A consumer consumes 3 units of X and
derives utility u1, u2, u3 and u4
Total Utility Ux= u1 + u2 + u3
• The total satisfaction of wants & needs obtained from the consumption of goods & services
• Based on the presumption that the amount of utility generated from the consumption of a good can be explicitly measures
• Hypothetical measure is util
Total Utility
Marginal Utility
The change in total utility (TU) derived from
one additional unit of consumption (X)
MU = TU/ X
Law of Diminishing Marginal Utility
“As the quantity consumed of a commodity
goes on increasing, the utility derived from
each successive unit goes on diminishing,
consumption of all other commodities
remaining the same”
When the changes in consumption are infinitely small, marginal utility is the derivative of total utility.
MU = dTU/dX
Law of DiminishingMarginal Utility
-20
-10
0
10
20
30
40
50
60
70
1 2 3 4 5 6
total utility
marginal utility
1 Ice Cream you feel Ecstatic
Example
As an example assume you have one ice cream,
13
You have a second Ice cream
2nd Ice Cream, u still feel Ecstatic
14
You have the third Ice cream
3rd Ice Cream You Feel Very Happy
15
You have the fourth Ice Cream
4th Ice Cream You Feel Happy
16
You have the fifth Ice Cream,
5th Ice Cream You Still Feel Happy
17
You have the sixth Ice Cream
6th Ice Cream You are not so Happy
18
You have the seventh Ice Cream
7th Ice Cream You are not so Happy
19
You have the eighth Ice Cream
8th Ice Cream You fall sick
Units Total Utility Marginal Utility
1st ice cream 20 20
2nd ice cream 32 12
3rd ice cream 40 8
4th ice cream 44 4
5th ice cream 45 1
6th ice cream 45 0
7TH ice cream 42 -3
8th ice cream 40 -5
The following table will make the law of diminishing marginal utility more clear
Law of Diminishing MU holds only under certain conditions (assumptions) :
1. Unit of the product s.b. standard – cup of tea, bottle of cold drink, etc.
2. No small units are consumed
3. Consumer’s taste/preference must remain same during period of consumption
4. There must be continuity in consumption (∆t = short)
5. Mental condition of the consumer must remain normal during the period of consumption
21
Assumptions
Limitations/Exceptions of Law of Diminishing Marginal
Utility
(i) Case of intoxicants
(ii) Rare collection
(iii) Application to money
Conclusion
We can say that the law of diminishing utility, like other laws of Economics, is simply a statement of tendency. It holds good, provided other factors remain constant.
Thank you !!!