Page 37 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 3.7 Explanation

This Law can be explained with the help of Table 2 and Fig. 3.2.

Table 2: Law of Diminishing Marginal Utility
Ice Cream Consumed Marginal Utility
First 4
Second 3
Third 2
Fourth 1
Fifth 0
Sixth –1
The above table shows that first cup of ice cream yields 4 units of marginal utility. This will satisfy your
want to some extent and the intensity of the want will come down. While the second cup of ice cream
will yield less marginal than the first one, again third cup of ice cream will yield less marginal utility
than second and this way fifth cup of ice cream will yield Zero marginal utility. If one is forced to take
the sixth one then the marginal utility becomes negative and one may suffer from indigestion.
It is proved from the above table that if more and more units of ice cream are consumed then the MU
from the each successive unit will diminish.
In Fig. 3.2. below, units of ice-cream are shown in OX axis while marginal utility is shown in OY axis. AB
is the Marginal Utility curve. It slopes downward from left to right indicating that first cup of ice cream
has yield 4 units, second cup of ice cream has yield 3 units, third cup of ice cream has yield 2 units,
fourth cup of ice cream has yield 1 unit, fifth cup of ice cream has yield 0 unit. So AB touches OX-Axis
at point ‘C’ which represents the fifth cup of ice cream while sixth cup of ice cream has given negative
(–1) unit. Here AB curve goes below OX-Axis.
Fig. 3.2

Y Marginal Utility
Curve
A +ve Point of Saturation
4
Marginal Utility 3 (Zero M.U.)
2
1
0 C X
12 34 5 6
–1 –ve
Icecream B
Quantity
Self Assessment

Multiple choice questions:
4. ......................... has developed the theory of the Diamond-Water Paradox.
(a) Adam Smith (b) Samuelsson (c) Marshall (d) Boulding
5. A price for a commodity, is not equal to its total utility but is equal to its ......................... utility.
(a) marginal (b) total (c) difference (d) additional
6. The Law of Diminishing Marginal Utility is the ......................... of utility analysis.
(a) foundation stone (b) saving (c) income (d) price

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