individual derives from consuming an additional unit of a good or service. Formula : MU = Change in total utility Change in quantity = ∆ TU ∆ Q
The Cardinal Approach Law of Diminishing Marginal Utility (Return) = As more and more of a good are consumed, the process of consumption will (at some point) yield smaller and smaller additions to utility When the total utility maximum, marginal utility = 0 When the total utility begins to decrease, the marginal utility = negative (-ve)
THE LAW OF DIMINISHING MARGINAL UTILITY This law states that, as the amount of a good consumed increases, the marginal utility of that good tends to diminish. (Law was proposed and developed by A. Marshall)
What is the reason for this law? Utility tends to increase as you consume more and more of a good. However, according to the law of diminishing marginal utility, as you consume more and more, your total utility will grow at a slower rate. Growth in TU slows because your MU (the extra utility added by the last unit consumed of a good) diminishes as more of the good is consumed. The diminishing marginal utility results from the fact that your enjoyment of the good drops off as more and more of it is consumed.
EXAMPLE Number Purchased Total Utility Marginal Utility 0 0 0 1 4 4 2 7 3 3 8 1 4 8 0 5 7 -1
The Cardinal Approach TU, in general, increases with Q At some point, TU can start falling with Q (see Q = 5) If TU is increasing, MU > 0 From Q = 1 onwards, MU is declining principle of diminishing marginal utility As more and more of a good are consumed, the process of consumption will (at some point) yield smaller and smaller additions to utility
Equimarginal Principle / Maximizing Utility The fundamental condition of maximum satisfaction or utility is the equimarginal principle . It states that a consumer having a fixed income and facing given market prices of goods will achieve maximum satisfaction or utility when the marginal utility of the last dollar spent on each good is exactly the same as the marginal utility of the last dollar spent on any other good.
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- Utility, MUy