Question

Explain Law of Diminishing Marginal Utility with the help of an example and diagram.

Hint:

Remember the three key relationships between TU and MU: 1. When TU increases, MU is positive. 2. When TU is maximum, MU is zero. 3. When TU decreases, MU is negative.

Answer 1

Step 1: Statement of the Law:
The Law of Diminishing Marginal Utility states that as a consumer consumes more and more units of a specific commodity, the marginal utility (or additional satisfaction) derived from each successive unit goes on diminishing, assuming that the consumption of other commodities remains constant.

Step 2: Explanation with an Example (Schedule):
Let's consider a person who is very thirsty and drinks glasses of water. The satisfaction derived from each successive glass of water can be shown in a utility schedule.\[\begin{array}{|c|c|c|} \hline Glasses of Water & Total Utility (TU) & Marginal Utility (MU) \\ \hline \text{1} & \text{10} & \text{10} \\ \hline \text{2} & \text{18} & \text{8} \\ \hline \text{3} & \text{24} & \text{6} \\ \hline \text{4} & \text{28} & \text{4} \\ \hline \text{5} & \text{30} & \text{2} \\ \hline \text{6} & \text{30} & \text{0 (Point of Satiety)} \\ \hline \text{7} & \text{28} & \text{-2 (Disutility)} \\ \hline \end{array}\]The table shows that as the person drinks more water, the Total Utility increases but at a decreasing rate, while the Marginal Utility from each additional glass continuously falls. After the 6th glass, TU is maximum, and MU is zero. The 7th glass leads to disutility (negative MU).

Step 3: Explanation with Diagram:
The relationship between Total Utility (TU) and Marginal Utility (MU) can be shown graphically. \begin{center} \begin{tikzpicture}[scale=0.9] % Upper panel for TU \begin{scope}[yshift=4cm] \draw[->] (0,0) -- (8,0) node[right] {Glasses of Water}; \draw[->] (0,0) -- (0,5) node[above] {Total Utility (TU)}; \draw[thick, color=blue] (0,0) .. controls (2,3.5) and (4,4.5) .. (6,4.5); \draw[thick, color=blue] (6,4.5) .. controls (6.5,4.4) and (7,4) .. (7.5,3.5); \node[above] at (4, 4.6) {TU}; \draw[dashed] (6, 4.5) -- (6, -2); \node at (6, 4.5) [circle,fill,inner sep=1.5pt]{}; \node[above] at (6, 4.5) {Maximum TU}; \end{scope} % Lower panel for MU \begin{scope}[yshift=0cm] \draw[->] (0,0) -- (8,0) node[right] {Glasses of Water}; \draw[->] (0,-2.5) -- (0,3) node[above] {Marginal Utility (MU)}; \draw[thick, color=red] (1,2.5) -- (6,0) -- (7.5, -1.5); \node[above] at (4, 1) {MU}; \node at (6, 0) [circle,fill,inner sep=1.5pt]{}; \node[below] at (6, 0) {MU=0}; \end{scope} \end{tikzpicture} \end{center} In the diagram, the TU curve rises, reaches a maximum when MU is zero, and then starts to fall when MU becomes negative. The MU curve slopes continuously downwards, illustrating the law of diminishing marginal utility.

Step 4: Final Answer:
The Law of Diminishing Marginal Utility explains that the satisfaction from consuming successive units of a good decreases. This is illustrated by a downward-sloping marginal utility curve and a total utility curve that increases at a decreasing rate.