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 !!!