Tell the Assumption and Exception of Marginal Utility.
Definition of utility:- Want Satisfying power of a good is called utility. It denotes a quality in a commodity or service by virtue of which our wants are satisfied.
According to Hibbdon, “Utility is the quality of a good that satisfies a want”.
Meaning of Marginal Utility
Meaning of Marginal Utility:- The change that takes place in the total utility by the consumption of an additional unit of a commodity is called marginal utility.
For Example:- By consumption of the first cup of tea you get 15 units of utility and by the consumption of the second cup of tea your total utility goes up to 25 units. It means, the consumption of a second cup of tea has added 10 units = 25-15 of utility to the total utility. So here the difference of 10 units of utility of consumption is called marginal utility.
Definition of Marginal Utility:- “Marginal utility is the addition made to the total utility in consumption by consuming one more unit of commodity and that difference lies in the previous and successive unit of a consumption.” is called marginal utility.
Assumptions of Marginal Utility Theory
The theory of marginal utility, particularly the Law of Diminishing Marginal Utility, is based on several key assumptions:
- Rational Consumer: The consumer acts rationally and aims to maximize total utility within their budget.
- Cardinal Measurement of Utility: Utility can be measured in numerical units (utils), making comparisons possible.
- Constant Marginal Utility of Money: The purchasing power of money remains constant throughout the consumption process.
- Independent Utility of Goods: The utility derived from one good does not affect the utility of another.
- Homogeneous Units of Consumption: Each unit of the good consumed is identical in size, quality, and utility.
- Continuous Consumption: Consumption occurs without long breaks to ensure consistency in utility measurement.
- Reasonable Consumption Range: The law applies only within a normal range of consumption and does not hold for extreme cases like addiction or necessities.
These assumptions provide the foundation for marginal utility analysis, helping explain consumer behavior and decision-making in economics. Assumption of marginal utility analysis
Exceptions to the Law of Diminishing Marginal Utility
While the Law of Diminishing Marginal Utility states that additional consumption of a good reduces its extra satisfaction, there are several exceptions where this may not hold:
- Hobbies and Collectibles: Items like stamps, rare coins, and art may provide increasing satisfaction as a collection grows.
- Addictive Goods: Products like alcohol, drugs, or gambling may create increasing utility due to psychological dependence.
- Knowledge and Education: Gaining more knowledge often leads to greater interest and satisfaction rather than diminishing utility.
- Money: Many argue that utility from money does not diminish significantly, as higher income can offer more choices and security. Assumption of marginal utility analysis
- Prestige or Status Goods (Veblen Goods): Luxury brands and designer items may increase in desirability as consumption rises, contradicting the law.
- Rare or Unique Experiences: Traveling to exotic locations or experiencing new adventures may provide continuous or increasing satisfaction. Assumption of marginal utility analysis
- Initial Lack of Appreciation: Sometimes, individuals need time to develop a taste for certain goods, such as classical music or fine wine, leading to increasing utility over time. Assumption of marginal utility analysis
These exceptions highlight cases where consumer behavior deviates from the traditional marginal utility theory, often influenced by psychological, social, or economic factors. Assumption of marginal utility analysis. You can check the syllabus of Business Economics on the official website of Gndu.
Conclusion of Marginal Utility
The concept of marginal utility explains how consumer satisfaction changes with each additional unit of a good or service consumed. It follows the Law of Diminishing Marginal Utility, which states that as consumption increases, the additional satisfaction (marginal utility) derived from each extra unit gradually decreases.
Most Important Question of Marginal Utility
Law of Diminishing Marginal Utility.