ECO204 Assignments Week 2 The Law of Diminishing Marginal Utility

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ECO 204 Principles of Microeconomics

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November 25th, 2019

The Law of Diminishing Marginal Utility

The satisfaction levels of a specific commodity vary from one individual to another,

while different people have different tastes and preferences that satisfy their wants. However, the consumption of a product reaches a particular pint that begins to lose satisfaction levels. Economists refer to the concept as utility and is further elaborated through a formula on how demand influences satisfaction. Therefore, this paper focuses on evaluating marginal utility, highlighting the connection with total utility, and diamond-water paradox.

Describe The Relationship Between Total Utility and Marginal Utility.

The utility is the contentment that a buyer gets from the consumption of a particular

commodity or service. Total utility is the total quantity of fulfillment received by a consumer after consuming certain goods or services. Consequently, marginal utility is the fulfillment that a buyer gets from the consumption of one additional unit of a specific product or service. Therefore, the total utility decreases with increased consumption of commodities or services, meaning that a person gets less utility when they consume additional units compared to when the consumer forego the consumption. When the marginal cost decreases, the total utility consequently increases at a diminishing rate. Subsequently, when the marginal cost is at zero, the total utility reaches its optimum, a point of saturation. The total utility falls when the marginal utility declines to negative.

Explain If Marginal Utility Can Be Negative.

A negative marginal cost shows that the good or service is too much, hence harmful. For

instance, the correct dosage of an antibiotic serves its purpose by killing dangerous bacteria in the body while taking too much can potentially harm the body. Therefore, a consumer no longer enjoys the good or service.  When marginal utility reduces to negative, it means that the consumption of an additional unit of a product. Therefore, if the marginal utility of a product is negative, the total utility declines accordingly.

Examine The Diamond-Water Paradox. Why Are Diamonds More Expensive Than Water?

The paradox of water and diamond states that diamond has a much higher value

compared to a diamond even though water is a basic need and essential to the life of a human being compared to diamond (Mohammed, 2018). The marginal cost and utility determine the price of a good; therefore, diamonds are much more expensive than water because both marginal cost and marginal utility are a factor while the marginal cost of a diamond is far much higher than the marginal cost of water. The marginal utility theory is primarily based on a subjective theory that the price of a particular product is determined by neither the labor input during its production nor its usefulness. The marginal cost is mainly the good’s usefulness to a person to satisfy their needs. Although the supply of water is abundant in the world, each additional unit becomes worthless. Conversely, diamonds are less in supply, and the usefulness is much higher than an extra glass of water.

Evaluate The Law of Diminishing Marginal Utility

The law of diminishing marginal utility indicates that the increase in the utility of a

commodity due to a rise in consumption reduces with each consequent rise in consumption levels (Amacher & Pate, 2019, Sec. 5.1). The marginal utility of a product reduces as the level of consumption also decreases. For instance, Fred is very hungry ad walks into a restaurant, and he is offered a buffet. The extent of contentment that Fred gains from a plate of food is directly

related to the level of his hunger. The first plate of food shall have a more excellent utility contrary to the third or the fourth plate, hence having higher satisfaction. A reduction in the level of hunger directly relates to less satisfaction meaning a decrease in the marginal utility.

Identify Some Items, Explaining Your Reasoning, That Does Not Follow the Law of

Diminishing Marginal Utility.

Exceptions of goods or services that fail to obey the law of diminishing marginal utility

do not vary in taste, customs, habits, and the wages of the customer. When there is an increase in the income of a consumer, it consequently increases the marginal utility of the goods. The individual who collects the old coins might be contented after he collects an extra unit of coins, though that person lacks the satisfaction of only one or two coins that he purchases. The collector might have the desire to end the collection of expensive paintings after one or two units but finds himself continuously buying because every new painting makes the collector more satisfied.

Evaluate how the law of diminishing marginal utility can explain the diamond-water paradox

A person’s hobbies, like coin and stamp collection, can violate the law of diminishing marginal utility if a person’s hobbies. The violation is caused by the development of continuous utility from an extra unit obtained from a hobby item. For example, a degree of satisfaction enhances if a new range of coins or stamps is established. Nevertheless, the utility lessens when the same type of coins or stamps is achieved every time. Also, it is hard to apply the law of diminishing marginal utility to misers since they derive significant utility from a wide range of any commodity.

Conclusion

The law of diminishing marginal utility implies that when more goods or services are

consumed, the utility reduces. When more products are consumed, less utility is attained. Some goods follow the law, such as food, while exceptions include hobbies. The first utility derived from the first product is higher ad has higher satisfaction while the utility starts declining to the point that the utility is zero or negative, meaning it results in disutility.

References

Amacher, R. & Pate, J. (2019). Principles of microeconomics (2nd ed.). Retrieved from

https://content.ashford.edu

Mohammed, F. (2018). Why Are Diamonds More Expensive Than Water? Business and

Economics. Retrieved from https://daily.jstor.org/diamonds-expensive-water/