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Mila [183]
2 years ago
11

Define and then explain in your own words the law of dimishing marginal utility/ returns

English
1 answer:
DaniilM [7]2 years ago
4 0

Answer:

The Law Of Diminishing Marginal Utility states that, all else equal, as consumption increases, the marginal utility derived from each additional unit declines. Marginal utility is derived as the change in utility as an additional unit is consumed. Utility is an economic term used to represent satisfaction or happiness. Marginal utility is the incremental increase in utility that results from consumption of one additional unit.

Understanding the Law

Marginal utility may decrease into negative utility, as it may become entirely unfavorable to consume another unit of any product. Therefore, the first unit of consumption for any product is typically highest, with every unit of consumption to follow holding less and less utility. Consumers handle the law of diminishing marginal utility by consuming numerous quantities of numerous goods.

Diminishing Prices

The Law of Diminishing Marginal Utility directly relates to the concept of diminishing prices. As the utility of a product decreases as its consumption increases, consumers are willing to pay smaller dollar amounts for more of the product. For example, assume an individual pays $100 for a vacuum cleaner. Because he has little value for a second vacuum cleaner, the same individual is willing to pay only $20 for a second vacuum cleaner. The law of diminishing marginal utility directly impacts a company’s pricing because the price charged for an item must correspond to the consumer’s marginal utility and willingness to consume or utilize the good.

Example of Diminishing Utility

An individual can purchase a slice of pizza for $2; she is quite hungry and decides to buy five slices of pizza. After doing so, the individual consumes the first slice of pizza and gains a certain positive utility from eating the food. Because the individual was hungry and this is the first food she consumed, the first slice of pizza has a high benefit. Upon consuming the second slice of pizza, the individual’s appetite is becoming satisfied. She wasn't as hungry as before, so the second slice of pizza had a smaller benefit and enjoyment as the first. The third slice, as before, holds even less utility as the individual is now not hungry anymore.

In fact, the fourth slice of pizza has experienced a diminished marginal utility as well, as it is difficult to be consumed because the individual experiences discomfort upon being full from food. Finally, the fifth slice of pizza cannot even be consumed. The individual is so full from the first four slices that consuming the last slice of pizza results in negative utility. The five slices of pizza demonstrate the decreasing utility that is experienced upon the consumption of any good. In a business application, a company may benefit from having three accountants on its staff. However, if there is no need for another accountant, hiring a fourth accountant results in a diminished utility, as little benefit is gained from the new hire.

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Related Terms

Total Utility

Total utility is the aggregate summation of satisfaction or fulfillment that a consumer receives through the consumption of goods or services. more

Utility Definition

Utility is an economic term referring to the satisfaction received from consuming a good or service. more

Above the Margin: Understanding Marginal Utility

Marginal utility is the additional satisfaction a consumer gets from having one more unit of a good or service. more

Marginal Rate of Substitution (MRS) Definition

Marginal rate of substitution (MRS) is the willingness of a consumer to replace one good for another good, as long as the new good is equally satisfying. more

Marginalism Definition

Marginalism is an economic principle that decisions and adjustments to economic behavior occur incrementally rather than categorically. more

Sluggish Economy

A sluggish economy is an economy that is experiencing slow or no growth. The term can refer to the economy as a whole or a component of it. more

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A Practical Look At Microeconomics

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What Is Utility Function and How Is It Calculated?

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Examples of the Law of Demand

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What Does the Law of Diminishing Marginal Utility Explain?

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What Is Marginalism in Microeconomics, and Why Is It Important?

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How does marginal utility and marginal benefit differ?

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