Managerial Economics

Topic : Law of diminishing marginal utility

Presented byLipi
Neelima Singh
Shashanka Baruah
Sohini Bhuwalka

What is Utility?
-Product angle: Want satisfying property of
any product (absolute).
-Consumer angle: The psychological feeling of
satisfaction or happiness or well being or benefit
derived by the consumer by the consumption of
certain units of a good or service at a certain
point of time (subjective).

Utility can be measured in two

ways:
-Cardinal Utility:Assigning

numerical values

to the amount of satisfaction

-Ordinal Utility::

Not assigning numerical

values to the amount of satisfaction but indicating

the order of preferences, that is, what is preferred
to what

Utility is of two types:

-Total Utility
-Marginal Utility

otal Utility

m of utility derived by consumer from multiple units consumed

point or over a period of time

mple: A consumer consumes 3 units of X and

ves utility u1, u2, u3 and u4

Total Utility Ux= u1 + u2 + u3

Total Utility
The total satisfaction of wants
& needs obtained from the
consumption of goods &
services
Based on the presumption that
the amount of utility generated
from the consumption of a good
can be explicitly measures
Hypothetical measure is util

Marginal Utility

The change in total utility (TU) derived from

ne additional unit of consumption (X)

MU = TU/ X

Law of Diminishing Marginal Utility

As the quantity consumed of a
commodity goes on increasing, the
utility derived from each successive
unit

goes

consumption

on

diminishing,

of

all

other

commodities remaining the same

When the changes in consumption

are infinitely small, marginal utility
is the derivative of total utility.
MU = dTU/dX

Law of Diminishing
Marginal Utility

Example

As an example assume you have

one ice cream,

1 Ice Cream you feel Ecstatic

You have a second Ice cream

2nd Ice Cream, u still feel Ecstatic

13

You have the third Ice cream

3rd Ice Cream You Feel Very Happy

14

You have the fourth Ice Cream

4th Ice Cream You Feel

Happy

15

You have the fifth Ice Cream,

5th Ice Cream You Still Feel

Happy
16

You have the sixth Ice Cream

6th Ice Cream You are

not so Happy
17

You have the seventh Ice Cream

7th Ice Cream You are

not so Happy

18

You have the eighth Ice Cream

8th Ice Cream

You fall sick
19

The following table will make the law of

diminishing marginal utility more clear
Units

Total Utility

Marginal Utility

1st ice cream

20

20

2nd ice cream

32

12

3rd ice cream

40

4th ice cream

44

5th ice cream

45

6th ice cream

45

7TH ice cream

42

-3

8th ice cream

40

-5

Assumptions
Law of Diminishing MU holds only under
certain conditions (assumptions) :
1.

Unit of the product s.b. standard cup

of tea, bottle of cold drink, etc.

2.

No small units are consumed

3.

Consumers taste/preference must

remain
same
during
period
of
consumption

4.

There
must
be
continuity
consumption (t = short)

in
21

5.

Mental condition of the consumer must

Limitations/Exceptions
of Law of Diminishing Marginal
Utility
(i) Case of intoxicants
(ii) Rare collection
(iii) Application to money

Conclusion
We

can say that the law of diminishing

utility, like other laws of Economics, is
simply a statement of tendency. It holds
good, provided other factors remain
constant.

Thank you !!!