Discuss the law of diminishing marginal utility. How is the demand curve, derived from it.

Utility is the want satisfying power of a commodity. The satisfaction a consumer receives from consuming a product is called utility. Total utility refers to the total satisfaction derived from all the units of that product consumed. Marginal utility refers to the change in satisfaction resulting from consuming an additional unit of that product. For example the total utility of consuming ten apples a week is the sum of total satisfaction provided by all ten apples. The marginal utility of the tenth apple consumed is the addition to total satisfaction provided by consuming that extra apple. In general we can say that MUn+1 = TUn+1 – TU i.e., the marginal utility of the (N +1) the unit of the commodity is given by the addition made to the total utility due to the consumption of that extra unit of the commodity.

A basic assumption of utility theory is referred to as the law of diminishing marginal utility. Which states that the marginal utility, generated by additional units of any product diminishes as an individual consumes more of it, keeping other thing being equal. The law of diminishing MU gives us the demand curve using the equilibrium condition. In a single commodity model. The consumer purchases, suppose quantity x of the commodity x or retain his money income (M) . Under these conditions the consumer is in equilibrium when the marginal utility of x is equated to its market  price (P.) i.e., MUx = P. At this level, the consumer maximizes his utility. if their are more commodities, the condition for the consumer equilibrium is given by equating the ratios of the marginal utilities of the individual commodities to their prices.

MUx/Px = MUy/Py = MUn/Pn
This equation says that the utility derived from spending an additional unit of money must be equal for all commodities.

Derivation of Demand Curve The derivation of demand curve is based on the law of diminishing marginal utility. The MU. may by shown by a negatively sloped line. Geometrically, MU., is the slope of the total utility. If MU is measured in money units, then the demand curve for is identical to the, positive segment of the MU curve. At x, MU is simply given by MUI. By definition, this MU, is equal to P1. Hence at P1, the consumer demand xl,quantity. Similarly, at x2, the marginal utility is MU2, which is equal to P2Hence, at P2the consumer will buy x2 and so on.

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Tags: Ba Economics

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