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Marginal Utility Theory

The document discusses the concept of utility in consumer theory, defining utility as the satisfaction derived from consuming goods. It explains marginal utility as the additional satisfaction gained from consuming one more unit of a commodity and introduces the law of diminishing marginal utility, which states that additional satisfaction decreases with increased consumption. The document also outlines assumptions related to utility measurement and exceptions to the law of diminishing marginal utility.

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19 views11 pages

Marginal Utility Theory

The document discusses the concept of utility in consumer theory, defining utility as the satisfaction derived from consuming goods. It explains marginal utility as the additional satisfaction gained from consuming one more unit of a commodity and introduces the law of diminishing marginal utility, which states that additional satisfaction decreases with increased consumption. The document also outlines assumptions related to utility measurement and exceptions to the law of diminishing marginal utility.

Uploaded by

addie
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We take content rights seriously. If you suspect this is your content, claim it here.
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CENTRE FOR DISTANCE AND ONLINE EDUCATION

Unit-3
Consumer Theory
Marginal Utility Theory

Course Outcome: Recognize the difficulties in managerial decision making today


CONCEPT OF UTILITY

Utility is the want satisfying power present in the


commodity. It is the expected satisfaction which a consumer
feels to get from the consumption of additional
commodities. A consumer makes demand of particular
commodity because he feels that the commodity possess
utility for him. Example- A student wants to write an essay
in his notebook. He is using Pen for writing. Pen has utility
for that student.
WHAT IS MARGINAL UTILITY

Marginal Utility- It refers to additional units of


utility derived from consumption of additional unit
of a commodity. In simple words we can say that
marginal utility refers to change in total utility due to
change in consumption.
MU =TU n - TU (n-1)
LAW OF DIMINISHING MARGINAL
UTILITY

According to the law of diminishing marginal utility,


other things being equal, marginal utility of a good
starts falling as an individual consumes more units of
it in a given period of time. Alternatively, as a
consumer consumes more and more units of a
commodity, the extra satisfaction that he derives from
successive unit of a commodity goes on diminishing.
ASSUMPTIONS

• The utility is measurable and a person can express


the utility derived from a commodity in quantitative
terms such as 2 units, 4 units and 7 units etc.
• A rational consumer aims at the maximization of his
utility.
• It is necessary that a standard unit of measurement is
constant.
• A commodity is being taken continuously. Any
gap between the consumption of a commodity
should be suitable.
• There should be proper units of a good consumed
by the consumer in a rationale quantity.
DIAGRAMMATIC
PRESENTATION
• MU curve is downward sloping. The downward
slope of MU curve implies that MU derived from
each additional unit goes on declining.
• Between points O and B, marginal utility
remains positive and greater than zero.
Correspondingly, total utility is increasing until
consumer consumed OB amount of good X.
• As MU becomes zero (corresponding to point B),
total utility curve reached its maximum point which
is shown as point A. As total utility curve reaches its
maximum point, it is a point of saturation..
• As MU derived from the consumption of additional
unit becomes negative, TU curve starts declining .
EXCEPTIONS TO LAW OF
DIMINISHING MARGINAL UTILITY
• Curious and rare things: the law of diminishing
marginal utility does not apply in case of the hobby
of an individual. For instance, the hobby of an
individual is to collect old and rare coins
• Misers: the law does not apply to misers who always
wish to acquire more and more of wealth.
THANK YOU

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