Posted in Finance, Accounting and Economics Terms, Total Reads: 139
Definition: Diminishing Marginal Utility
Diminishing Marginal Utility can be defined as the decrease in utility derived from the consumption of one extra product if the person keeps on consuming the same product keeping the consumption of other products as constant.
The satisfaction that a consumer derives from consuming one extra Chapatti decreases as the person keeps on increasing the consumption of chapatti keeping the consumption of other product constant.
Uses of Law of Diminishing marginal utility
1. Price determination of goods is based this law. As the supply of good in the market increases the marginal utility of the product deceases and hence the price of the good because the demand of the product decreases
2. The rule of progressive taxation is based on this law. As the wealth of rich people increases the marginal utility of wealth decreases for them while that is not in the case of poor people. So it makes more sense to charge more tax from rich than the poor as they are significantly in better position to pay money than their poorer counterparts.
3. Many of the economic law such as law of demand , elasticity of demand and consumer surplus are based on the law of diminishing marginal utility
Limitation of Law of Diminishing Marginal utility
1. Law of diminishing marginal utility does not take into account the taste and behaviour of the individuals. This means some of the individuals may not have decreasing marginal utility even when the consumption of the product increases.
2. Marginal utility can’t be measured in numbers which makes it difficult to measure and analyse.
3. It does not specify the time interval between the consumption of good which makes the very concept of utility difficult to link to.