Illustration of the law of diminishing marginal utility: Table 1 Diminishing Marginal Utility Cups of tea consumed per day Total utility (utils) Marginal utility (utils) 1 12 12 2 22 10 3 30 8 4 36 6 5 40 4 6 40 0 7 39 -2 8 34 -5 3
1 2 3 4 5 6 7 8 0 5 10 15 20 25 30 35 40 45 Total utility (utils) 1 2 3 4 5 6 7 8 -6 -4 -2 0 2 4 6 8 10 12 14 Marginal utility (utils) Fig. 1-TU and MU Table 1 presents total utilities (TU) and marginal utilities (MU) derived by a person from cups of tea consumed per day. The first cup of tea gives him 12 utils. Because this is the first cup, his marginal utility is also 12 utils. With the consumption of the second cup of tea, his marginal utility falls to 10 and the total utility is 22. It can be seen from the table that as the person keeps on consuming more cups of tea, the marginal utility derived from additional cups of tea will fall and the total utility though increasing is decreasing. The person does not get any marginal utility from the 6 th cup of tea and so the total utility is constant at 40. After the 6 th cup of tea, the consumption of additional cups of tea gives him negative marginal utility and the total utility diminishes. The seventh cup gives him negative marginal utility equal to -2. This may be because too many cups of tea may cause acidity, etc. The extra cups of tea beyond the 6 th unit gives him disutility. We have graphically represented the data of the table in Fig. 1. The TU curve suggests that upto the 6 th cup, the total utility increases but beyond the 6 th cup, the total utility declines. In other words, the marginal utility of the additional cups of tea upto the 6 th cup is decreasing but positive. But beyond the 6 th cup, the marginal utility from the additional cup becomes zero and then negative suggesting disutility. 4
Relationship between MU and TU: From the table and the diagram it can be seen that from the 1 st to the 5 th cup, the MU is decreasing but positive and the TU is increasing at a decreasing rate. The MU from the 6 th cup is zero and the TU reaches its maximum at 40 utils and is constant. From the 7 th cup, the MU starts becoming negative and the TU starts decreasing. The downward sloping MU curve has an important role in the demand law because the demand curve is derived from it. Law of equi-marginal utility: Consumer’s equilibrium The law of equi-marginal utility explains the principal of consumer’s equilibrium. This law is used in the derivation of the demand curve. Suppose, there are two goods X and Y on which the consumer has to spend a given income. Let us assume that the consumer wants to maximise utility and so he will choose the most preferred good from what is available. The consumer’s behaviour will depend on two things. (1). The marginal utilities of the goods and (2). The prices of the two goods. Suppose the prices of the goods are given. How will the consumer choose between X and Y? If good X price is twice as much as good Y, then the consumer will buy good X only when its marginal utility is at least twice as much as good Y’s marginal utility.
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