Question

What is the relationship and significance of the Law of Diminishing Marginal Utility and consumer decision making?

Answer 1

The Law of Diminishing Marginal Utility states that if the consumption of a commodity increases, the satisfaction derived from it gently increases but at a decreasing rate, to the point were it reaches zero. the utility gained from successive units of a commodity diminishes, that is, marginal utility (MU) of a commodity diminishes as the consumer gains larger quantities of it. this is termed as the axiom of diminishing marginal utility. for example, a person or an individual may buy a particular type of biscult for a while, but ,may soon buy less of it and choose another type of biscult because the utility gained from the initial one is diminishing.

the consumers decision making process depends up on the idea that when the consumer goes to the market to purchase a commodity, he doesnt give equal importance to all the commodities he buys, instead, he gives more importance to one and less to others.

lets take another example:

quantity (Q)	total utility (TU)	marginal utility (MU)
1	30	30
2	50	20
3	60	10
4	68	8
5	74	6
6	78	4
7	79	0
8	77	-2
9	73	-4

the above table shows that when an individual A consumes 1 quantity of commodity, the individual derives a Total utility of 30 utils and marginal utility of 30 utils. when he consumers 2 quantity of commodity, his TU increases to 50 utils, but his Marginal Utility reduced to 20 utils. this continuous until it becomes negative. this can be depicted in the following diagram.

the mathermatical interpretation of law of diminishing marginal utility

the utility function is upward sloping and concave in shape.

MU(x)= dTU(x)/dx

significance of law of diminishing marginal utility (DMU) are:

1. the law of DMU helps in utilizing the resources viabily and economically. it means, when consumer buys more of a commodity, his MU declines.

2. the law of DMU is the basic law of consumption.

2. diamond water paradox - the diamonds have higher MU and higher price. water is abundent compared to diomand and has lower MU and less price.