Page 50 - DECO405_MANAGERIAL_ECONOMICS

Unit 4: Consumer Behaviour (Utility Analysis)

The "Law of Diminishing Marginal Utility" can be put in other way as total utility increases Notes
more and more slowly as the quantity consumed increases. With every additional increase in
the consumption the total utility increases but at decreasing rate. It is happens due to the
underlying decrease of marginal utility. The value of total utility also declines and it starts
declining when the value of marginal utility gets negative. Let us explain it with an example.

Example: When a thirsty person takes five bottles of cold drink continuously, the
consumption of first bottle gives him utility, second bottle gives him lesser utility than first but
his total utility increases. Third bottle gives him still less utility but increases total utility. The
utility from fourth bottle may be zero as he is no more thirsty. But the fifth bottle may cause
uneasiness and thus give negative utility, i.e., the total utility may now actually go down.

Task Do you think there are exceptions to the law of diminishing marginal utility?
Explain your opinion with the help of examples.

Table 4.1

Figure 4.1

According to the law of diminishing marginal utility when a person consumes more and more
units of a good his total utility increases while the extra utility derived from consuming successive
units of the good diminishes. The total utility reaches a maximum value when marginal utility
approaches zero and then total utility starts declining.

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