What is Marginal Utility and Law of Diminishing Marginal Utility?

CONSUMER’S EQUILIBRIUM – MEANING OF UTILITY, MARGINAL UTILITY, LAW OF DIMINISHING MARGINAL UTILITY.

Consumer Equilibrium

Equilibrium refers to maintaining a balance between the two variables at the same level. A consumer is considered to be at the state of equilibrium when he gets the maximum amount of satisfaction, for the number of products and services he is willing to purchase at present level of income and current level of price. It is the point consumer gets the maximum amount of Utility.

In order to understand the concept of consumer Equilibrium, it is important to understand Utility, Total Utility, Marginal Utility, the law of diminishing marginal returns etc

Utility

Utility refers capacity of a commodity to satisfy the human wants or power of a commodity to satisfy the consumer. It refers to the amount of satisfaction consumer gets from the purchase of goods and services.

“the ability of a good to satisfy a want” Prof Hibdon

Total Utility

Sum total of satisfaction derived from consumption of all the units. It refers to the psychological satisfaction that consumer derived from consuming given amount of a commodity.

“Total Utility refers to total satisfaction from the amount of a commodity consumed” Lipsey

For example- if we eat 2 loaves of bread at breakfast, the total utility is total satisfaction obtained from consuming 2 loaves of bread.

Sum of Marginal Utility is known as the total utility.

Where TU- Total Utility and – a sum of the total utilities from different units of a commodity

Marginal Utility

It is the additional utility, consumer arising from the consumption of one more unit of a commodity.

“The Marginal Utility is the utility which results from a unit increase in consumption” Prof Boulding

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Concept of Law of Diminishing Marginal Utility

Law of Diminishing Marginal Utility is also known as the fundamental law of satisfaction or Psychological law. It states that as consumer consumes more and more units of the commodity.

“As the amount consumed from a commodity increase, the utility derived by the consumer from the additional unit i.e. Marginal utility goes on decreasing” Alfred Marshall

Assumptions

• All the units of a commodity are same in terms of size, quality, design etc
• Unit of a good must be standard
• No change in taste
• No change in the price of substitute goods
• Continuity in consumption.

Relationship absorbed between TU and MU

• When Marginal Utility falls, Total Utility increases at a diminishing rate.
• When Total Utility is maximum, Marginal Utility is Zero
• When Total Utility is decreasing, Marginal Utility is negative

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