Diminishing Marginal Utility Curve
In this figure 5.2, a curve MU has been drawn which slopes downward from left to right. This is the diminishing marginal utility curve. It shows that -as the quantity of (he commodity with the consumer increases, its marginal utility decreases. When he has OM, quantity, the marginal utility is M, Q and when the quantity increases to OM2, the marginal utility decreases to M2 R. In the same manner, the marginal utility of the quantity . When the quantity increases to OM7, the marginal utility drops to zero and it becomes negative below the X-axis) when the consumer comes to have OMs quantity.
Why docs the marginal utility fall when the quantity of the commodity with the consumer increases?
As already pointed out, there are two reasons: (a) Even though human wants in the aggregate are ‘unlimited, yet a particular want can be almost fully satisfied. Hence, when a consumer consumes more and more of a commodity, his wants is satisfied and he does not desire further increments of thc commodity. Thus: his marginal utility decreases as his consumption of that commodity increases. A stage comes when further consumption brings the marginal utility down to zero.
the income of the consumer remains the same. Any change in income will falsify the law. For instance, a rise in a man’s income may raise in his eyes the value of the various plots in his big compound of which he could not make much use before.
Hare Collections. In the case of rare collections, the law does not hold good. If, for instance, a man is collecting ancient coins, the more he is able to collect the greater will be his satisfaction. Hence, in such cases, the law of diminishing marginal utility does not hold good.
Change in Other People’s Stock. TIle law says that marginal utility decreases when there i. an increase in our stock. But, in some cases, the utility changes, not because of a change in what we have but because of a change in other people’s stock. For example, if I have a rival in the town collecting ancient coins, and somehow he loses his collection, the utility of my collection automatically goes up. In the same manner. utility to me of m)’ telephone increases as the number of telephone connections increases. The value of without any change in its dimensions when a railway station has been built nearby.
Also depends on our other possessions. The law ignore the relation of complementarity. For example, a carriage may be lying useless with us. but, as soon as we are able to buy a horse, its utility at once goes up. Thus, change in our other possessions can also bring about a change in marginal utility.
Fashion. Further, utility depends on fashion too. The utility of my goes up when that dress comes in fashion. If, on the other hand, it goes out of fashion, the utility goe down. (x) Not Applicable to . The Law does not apply to money as it is said that more money he has, the more he wants. But as explained below, it does apply to money too.
Conclusion. The law of diminishing utility, like other economic laws, is merely a statement of a tendency. It depends upon so many conditions. If the conditions arc not fulfilled. the lav does not apply a. in the many exceptional cases mentioned above.It is worth noting Ihat the law of diminishing utility docs not operate because the successive.units ; of the commodity arc inferior. Although it is understandable that if a unit is of inferior quality ipso its utility will be less, yet the law is far more fundamental. It is independent of quality. The toasts may all be of a uniform quality still the additional utility will decrease as consumption proceeds.
marginal utility is not the utility of the 5th toast, because all the toasts are supposed to be alike. It refers to the addition made to the previous total by. the consumption of this particular toast. Marginal utility is the increase in total utility resulting from the consumption of the marginal unit. The following formula may be used to measure.
It thus measures the ratio of change in the two variables.
The margin is not something rigid or fixed. It shifts forward and backward according to changes in price. If the price falls, it will become worthwhile to purchase more of the commodity and the margin will descend and vice-versa.
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