What is Utility | Marginal Utility | Law of Diminishing Marginal Utility

Mon, 09/19/2011 - 11:41 -- Umar Farooq

That property of a commodity which satisfies the wants of the consumers is called utility. Then it is want satisfying power of a commodity. It is subjective and ethically neutral concept.

Total Utility

Sum of utilities derived from the consumption of certain units of a commodity. Number of units consumed increased total utility increases with a diminishing rate.

Marginal Utility

Marginal utility is the utility derived from consumption of one additional unit of a commodity.

MUn = TUn – TUn-1 or

MUn = DTU/DQ              where DQ = 1

In graphical analysis the MU can be obtained by measuring the slope of the TU curve.

Law Of Diminishing Marginal Utility

The law has seen developed by Marshall, the founder of cardinal utility analysis.

The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase the stock he already has.

Cups of tea                Total Utility           Marginal Utility

1                                          12                              12

2                                          22                              10

3                                          30                              8

4                                          36                              6

5                                          40                              4

6                                          41                              1

7                                          39                              -2

8                                          34                              -5

 

Illustration of Law

When one cup of tea is taken per day. The total utility will be 12 and due to its first cup the marginal utility will also 12.  With the consumption of two cups per day the total utility rises to 22 but marginal utility will fall to 10.  The consumption of tea increases six cups per day, from these additional cups he marginal utility will goes on diminish.  When 7 cups of tea consumed per day then instead of giving positive marginal utility the seventh cup will give negative marginal utility  -2, this is due to too many cups consumed per day may cause him gas trouble or acidity.  More than six cups of tea per day gives inutility rather than satisfaction.

Utility Analysis & Assumptions of Cardinal Utility Analysis

The Classical and neo-classical theories of welfare based on cardinal utility.  The premises on which utility bases are below:

1. Cardinal Measurement of Utility

Utility is a measurable and quantifiable entity.  A person can express the utility or satisfaction derived from a good in quantitative term as 10 units, 15 units, 20 units.  It can be express in cardinal number.

2. Independent Utility

The second important tent of the cardinal utility analysis is the hypothesis of independent utility.  On this hypothesis the utility which a consumer derives from a good is the function of quantity of that good and of that good only.  It dose not depend at all upon the quantity consumed of others goods. The goods possess independent utilities and or addictive.

3. Marginal Utility of Money Remain Constant

Another important premises of Marshall’s marginal utility analysis is the constancy of marginal utility of money. According to it marginal utility of a commodity diminishes as more of it is purchased or consumed, the marginal utility of money with the purchases remains constant throughout.

The assumption of constant marginal utility of money is a crucial Marshallian utility analysis. When the price of a good falls and real income of a consumer rises, and the marginal utility of money will fall, but Marshall ignore this and assume that marginal utility of money did not change as a result of change  in price.

4. Introspection Method

Another important assumption of the cardinal analysis is the use of introspective method of judging the behaviour of a marginal utility.  The cardinalist school assumes that the behaviour of marginal utility in the mind of another person can be judged with the help of self observation.

Let suppose, a person know that he purchase more and more a good the less utility he derived from the additional utility of it.  Applying this method a person can read other person mind and can say with confidence that marginal utility of a good will diminish as have more units of it.

Comment on Article & Like us