The relationship between declining additional value and demand, as elucidated by the law of diminishing marginal utility, and its influence on the demand curve.
The law of diminishing marginal utility is a fundamental concept in economics that explains how the additional satisfaction gained from consuming an additional good or service decreases as consumption increases. This law was first proposed by economist Carl Menger in the 19th century [1].
In simple terms, the law of diminishing marginal utility suggests that the first unit of a good or service provides the most satisfaction, and each subsequent unit provides less satisfaction. For example, if you're eating an apple, the first bite will give you the most pleasure, the second bite less, and so on.
This decline in marginal utility leads consumers to value each extra unit less, influencing their willingness to pay less for additional units [2]. This effect shapes the demand curve by causing it to slope downward. Since each additional unit provides less utility, consumers will only purchase more if the price decreases [3].
The law of diminishing marginal utility has two main applications: diminishing marginal utility of money and diminishing marginal utility of consumption [4]. It explains why, when prices fall, consumers buy more because the lower price compensates for the reduced additional satisfaction from extra units [2]. Conversely, at higher prices, consumers buy less because the utility derived from high-priced units is not justified.
The law assumes sequential consumption, meaning the goods are bought immediately and at the same time. However, the concept of diminishing marginal utility does not apply if consumption decisions are made at different times or places [5]. Understanding the concept of a consumption bundle is important for understanding the law of diminishing marginal utility [6].
The utility function, utility types, and consumer choice theory are related to the law of diminishing marginal utility. Utility in economics represents the satisfaction or benefit gained from consuming goods or services, and is a subjective concept [7]. Marginal utility is a measure of the extra satisfaction gained from an additional consumption of goods or services [8]. The marginal utility curve, when quantified into the price that one is willing and able to pay, is the same as the demand curve [9].
It's important to note that the law of diminishing marginal utility may not hold if the quality of goods increases or decreases [10]. For instance, if one does not like the taste of a drink, the concept of diminishing marginal utility may be inapplicable.
The law of diminishing marginal utility is essential to explain the reasons behind the demand curve's negative slope. An increase in the money supply through monetary policy will only reduce the exchange rate (purchasing power) of money due to the law of diminishing marginal utility of money [11].
In conclusion, the law of diminishing marginal utility plays a crucial role in understanding consumer behaviour and the demand for goods and services. It helps us understand why consumers value each additional unit of a good less and why the demand curve slopes downward. However, it's essential to remember that this law assumes rational consumers, consistent preferences, and measurable utility.
[1] Menger, C. (1871). Principles of Economics. Translated by James Dingwall and Edward C. Rae. London: Longmans, Green, and Co. [2] Samuelson, P. A., & Nordhaus, W. D. (2010). Economics. 20th edition. McGraw-Hill. [3] Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. 8th edition. W.W. Norton & Company. [4] Kreps, D. M. (2011). A Course in Microeconomic Theory. Princeton University Press. [5] Mas-Colell, A., Whinston, M. D., & Green, J. (1995). Microeconomic Theory. Oxford University Press. [6] Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. 8th edition. W.W. Norton & Company. [7] Samuelson, P. A., & Nordhaus, W. D. (2010). Economics. 20th edition. McGraw-Hill. [8] Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. 8th edition. W.W. Norton & Company. [9] Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. 8th edition. W.W. Norton & Company. [10] Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. 8th edition. W.W. Norton & Company. [11] Mankiw, N. G. (2014). Principles of Economics. 7th edition. Cengage Learning.
Investing in a business could be influenced by the law of diminishing marginal utility, as consumers are willing to pay less for additional units of a good or service when each subsequent unit provides less satisfaction. Furthermore, understanding the law of diminishing marginal utility of money is crucial in finance, as it explains why consumers buy more when prices fall due to the reduced additional satisfaction from extra units.
