What is Law Of Diminishing Marginal Utility?
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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 the incremental increase in utility that results from the consumption of one additional unit. "Utility" is an economic term used to represent satisfaction or happiness.In simple terms, the law of diminishing marginal utility means that the more of an item that you use or consume, the less satisfaction you get from each additional unit consumed or used.
Definition
The Law of Diminishing Marginal Utility states that, all else being equal, as consumption increases, the marginal utility derived from each additional unit decreases. Marginal utility refers to the incremental benefit gained from consuming one more unit of a good or service. In simple terms, the more of something you use or consume, the less satisfaction you get from each additional unit.
Origin
The Law of Diminishing Marginal Utility originated in the 19th century economic studies, first systematically described by German economist Hermann Heinrich Gossen. Gossen introduced this concept in his 1854 work, "The Laws of Human Relations." The theory of marginal utility was later developed and refined by economists such as William Stanley Jevons and Carl Menger.
Categories and Features
The Law of Diminishing Marginal Utility applies to various goods and services. Its key feature is that as the quantity consumed increases, the utility gained from each additional unit decreases. This law is crucial in explaining consumer behavior and the shape of demand curves. It helps economists understand why demand curves typically slope downwards and how consumers allocate resources to maximize utility under budget constraints.
Case Studies
A classic example is drinking water. When a person is very thirsty, the first glass of water provides the greatest satisfaction. However, as more water is consumed, the additional satisfaction from each subsequent glass decreases. Another example is movie tickets. Watching a new movie for the first time might be very enjoyable, but watching it repeatedly can significantly reduce the marginal utility.
Common Issues
Investors often misunderstand the scope of the Law of Diminishing Marginal Utility. It primarily applies to consumer goods and may not be directly applicable to all investment products. Additionally, the rate at which marginal utility decreases can vary among individuals, influenced by personal preferences and external conditions.
