Question

State and explain the law of diminishing marginal utility.

Hint:

Use a schedule or graph to illustrate: Total Utility increases at a decreasing rate, Marginal Utility falls.

Answer 1

Step 1: Statement of the Law The law of diminishing marginal utility, proposed by economists like Alfred Marshall, posits that the marginal utility (additional satisfaction) from consuming additional units of a commodity decreases as the quantity consumed increases, ceteris paribus (other things being equal).
Step 2: Explanation with Example
- Marginal utility is the change in total utility from consuming one more unit. For instance, if a person eats one apple, they get high satisfaction (e.g., 10 units). The second apple gives less (e.g., 8 units), the third even less (e.g., 6 units), and so on, until it may become zero or negative.
- This occurs because needs are satisfied progressively, and the intensity of want decreases.
Step 3: Assumptions and Exceptions
- Assumptions: The consumer's tastes remain constant, units are identical and consumed successively without time gaps, and the good is homogeneous.
- Exceptions: Applies less to rare collections (e.g., stamps), addictions, or money (as more money can increase utility indefinitely in some views).
- Importance: Explains downward-sloping demand curves, consumer surplus, and progressive taxation.