The law of diminishing marginal utility free essay sample

The law of diminishing marginal utility means that the value of a good, the extra utility derived from good, declines as more of the good is consumed. The law of diminishing marginal utility pops up throughout the study of economics, it is most important to the study of demand and the law of demand. It offers preliminary insight into the age-old question: Why does the demand curve have a negative slope? The key to this connection is that the demand price that a buyer is willing and able to pay for a good depends on the satisfaction (utility) generated from consumption. A buyer is willing to pay a higher demand price if utility is greater or a lower demand price if utility is less. Marginal utility declines asthe consumption of good increases and as quantity demanded of good increases its price tends to fall. So this is clear evidence that for larger quantity consumers offer low prices because of low level satisfaction they gained from such large amount quantity. We will write a custom essay sample on The law of diminishing marginal utility or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The law of diminishing marginal utility has a direct bearing on the market demand, the demand price, and the law of demand. If the satisfaction obtained from a good declines, then buyers are willing to pay a lower price, hence demand price is inversely related to quantity demanded, which is the law of demand. The Law of Equi-Marginal Utility is an extension to the law of diminishing marginal utility. The principle of equi-marginal utility explains the behavior of a consumer in distributing his limited income among various goods and services. This law states that how a consumer allocates his money income between various goods so as to obtain maximum satisfaction. In other words, when consumer’s marginal utilities of last unit money spend on each good is equal, then he is said to be in equilibrium position. 3) Limitations of Marginal utility theory/law of diminishing marginal utility: 1) Utility is theoretical term, so it is based on estimation and cannot be measured. 2) It is based on many assumptions, so the result may be inaccurate and unrealistic. 3) There are some products for which utility increase as consumption increases like the desire to acquire knowledge increase as a person gets the education. Moreover, In the case of Giffen goods, for which consumer will buy less of a quantity when its price falls, theory of marginal utility fails. 4) It assumed that consumer income and price of products remain constant but as we all know that consumer income plus prices of commodities doesn’t remain same for long period. 5)This approach assumes that the utility to a consumer depends upon that commodity alone, while in real world, utility also depends upon the availability of substitutes and complements like the utility of a car also greatlyrely upon availability of petrol. Taste and preference of a consumer changes from time to time. 7)It is assumed that the consumption of commodity should be continuous. If there is interval between the consumption of the same two units of the commodity, the law of diminishing marginal utility may not hold good. 8) According to this theory consumer always behave rationing manner but sometimes consumer may be forced to choose a wrong choice due to ignorance or advertisement.