Not only in economic theory, but also in life, we often encounter such a concept as marginal utility. The law of diminishing marginal utility is a good example of the fact that good is valued only when it is not enough. Why this happens and what we are talking about, we will consider further.
What is marginal utility?
Let's first understand what utility is in general. When we go to the store, we evaluate any product in terms of need for it. If we need bread, we go to the appropriate department. But there is a lot of choice: white, black, with sesame seeds, with bran. Now we evaluate the product in terms of usefulness for us. So in economics the usefulness of an object is explained, or, in other words, it is the degree of satisfaction of the needs of the individual.
But how many loaves of bread will you buy at a time? One? Two? Well, a maximum of three, and then if you have a large family. What satisfaction do you get from the first loaf? You probably eat a few bites with appetite, then a few more to eat. Will you cut a second loaf? Probably not, because you are full. This is utmost utility. The law of diminishing marginal utility states that with every new portion you consume, you get less and less pleasure.
One more example
The rule applies to any area of life. Here is another very good example. Let's say you’ve dreamed all your life about a radio-controlled helicopter. All your friends found out about this and decided to make a birthday present. The first guest came and presented a long-awaited toy. You will surely be in seventh heaven. Then a second friend came and also presented a similar model. You are pleased, but not so, because you no longer need a second helicopter. But then another 10, 20 guests came and everyone presented the same toy. Will you be happy with all the other gifts?
This is how marginal utility is expressed. The law of diminishing marginal utility is always relevant under any circumstances. There is even a well-known saying about this: "little good."
General Utility Graph
We examined the concept of marginal utility. The law of diminishing marginal utility cannot be understood without considering two graphs. The first concerns general utility and is as follows.
The vertical axis displays the total utility, which represents the total satisfaction of all consumed goods. Suppose one lunch, consisting of 2 dishes, brings a total usefulness of 4, as shown in the graph (Q - the amount of consumed goods). General utility tends to grow to a certain point when saturation occurs.
Marginal Utility Graph
Now consider the effect of the law of diminishing marginal utility. Recall that in economic theory marginal utility is explained as satisfaction from one additional unit of good. That is, the option is being considered when a person is already full, and how much pleasure he will receive after he uses each subsequent unit of good. If you think logically, then the marginal utility function in this case should have a declining character, which we see in the figure.
The wording of the law
So, summarizing all of the above, we conclude. The law of diminishing marginal utility means that as the use of the number of units of a good increases, the total utility increases, but to a very small extent, and the marginal utility decreases.
In other words, the law reflects the relationship between how many units of good an individual consumed and how much pleasure he received from it. For the first time this theory was considered by the German scientist Hermann Gossen, and therefore the second name of the postulate is Gossen's first law.
Price dependence of demand
The law of diminishing marginal utility is of great practical importance. The economy considers it in terms of relevance to consumer demand. How do the total and marginal utility affect the amount of purchased goods? Thanks to this analysis, you can adjust prices and force people to take more than they expect. Consider a specific example.
Let's say we need apples. For an individual consumer, their value will be expressed by the data given in the table.
| Number of apples | Total utility, units | Marginal Utility |
| 1 | ten | ten |
| 2 | 18 | eight |
| 3 | 24 | 6 |
| 4 | 28 | 4 |
| 5 | thirty | 2 |
And now we will express these data, but taking into account the money spent on the purchase.
| Number of apples | Total utility, units | Marginal Utility |
| 1 | 5 | 5 |
| 2 | nine | 4 |
| 3 | 12 | 3 |
| 4 | fourteen | 2 |
| 5 | fifteen | 1 |
Data analysis
In the first table, we see how marginal utility changes. The law of diminishing marginal utility is displayed here perfectly. The more apples we buy, the less pleasure we get from each additional unit we eat.
In monetary terms, the situation is repeated. We will buy five apples, they will be useful for us in general, but we will regret that we bought so much, because this money could be spent on something else. Thus, marginal utility in monetary terms will also decline.
How marginal utility will change when price changes
We have already determined that the law of diminishing marginal utility means that with each new unit of goods its utility will decrease. The same thing happens depending on the price of the goods. Suppose one apple from the previous example costs 5 rubles. If a consumer buys one piece, then his total and marginal utility will be equal. He does not suffer losses, and, in other words, what he expects, pays for that.
But what happens if he wants to buy a second apple? The usefulness of money will remain at the level of 5 rubles, but the usefulness of the purchase will already decrease and equal to 4. Lost 1 ruble of loss. Now the consumer will think about whether he needs two apples if he loses twice as much money, but does not gain utility from this?
And if you lower the price of apples, let's say not 5, but 4? The first apple will bring additional utility, which means it will be transferred to the second apple. But the third will already be at a loss. We plot the dependence of consumption on the price level.
In this case, the marginal utility line (marked in red) is the demand line. The lower the price, the greater the chance that the consumer will buy a larger quantity of goods, even if its usefulness will not be of particular value.
Practical use
In practice, we face everyday examples of price reductions to satisfy consumer desires. Remember how often in the store you see the action: "Two for the price of one"? Acting in this way on the mind, smart marketers, using the law of diminishing marginal utility, make us buy more, without worrying whether we need this product or not.
More often than not, the principle of diminishing marginal utility works well for everyday goods: household chemical goods, food products. Here it can still be assumed that utility from an additional unit will be of low value. But the same clothes will definitely not provide the desired benefit to anyone. Well, why does a girl have two identical blouses? And she won’t give her friend, because they will look like. But all the same, upon seeing a tempting offer, in most cases, without hesitation, we will give away blood rubles.
