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Managerial Economics
Topic : Law of diminishing marginal utility

Presented by

Lipi



Neelima Singh



Shashanka Baruah



Sohini Bhuwalka
What is Utility?
-Product angle: Want satisfying property of any
product (absolute).
-Consumer angle: The psychological feeling of
satisfaction or happiness or well being or benefit
derived by the consumer by the consumption of
certain units of a good or service at a certain
point of time (subjective).
Utility can be measured in two
ways:
-Cardinal Utility:Assigning numerical values to the
amount of satisfaction

-Ordinal Utility::

Not assigning numerical values to

the amount of satisfaction but indicating the order of
preferences, that is, what is preferred to what
Utility is of two types:
-Total Utility
-Marginal Utility
Total Utility
Sum of utility derived by consumer from multiple units consumed
at a point or over a period of time
Example: A consumer consumes 3 units of X and
derives utility u1, u2, u3 and u4
Total Utility Ux= u1 + u2 + u3
Total Utility
• The total satisfaction of wants & needs
obtained from the consumption of
goods & services
• Based on the presumption that the
amount of utility generated from the
consumption of a good can be explicitly
measures
• Hypothetical measure is util
Marginal Utility
The change in total utility ( TU) derived from

one additional unit of consumption ( X)
MU = TU/ X
Law of Diminishing Marginal Utility
“As the quantity consumed of a commodity
goes on increasing, the utility derived from

each successive unit goes on diminishing,
consumption

of

all

remaining the same”

other

commodities
When the changes in consumption are
infinitely small, marginal utility is the
derivative of total utility.
MU = dTU/dX
Law of Diminishing
Marginal Utility
70
60
50
40
30

total utility

20

marginal utility

10
0
-10
-20

1

2

3

4

5

6
Example

As an example assume you have
one ice cream,

1 Ice Cream you feel Ecstatic
You have a second Ice cream

2nd Ice Cream, u still feel Ecstatic
13
You have the third Ice cream

3rd Ice Cream You Feel Very Happy
14
You have the fourth Ice Cream

4th Ice Cream You Feel
Happy

15
You have the fifth Ice Cream,

5th Ice Cream You Still Feel
Happy
16
You have the sixth Ice Cream

6th Ice Cream You are
not so Happy
17
You have the seventh Ice Cream

7th Ice Cream You are
not so Happy

18
You have the eighth Ice Cream

8th Ice Cream
You fall sick
19
The following table will make the law of
diminishing marginal utility more clear
Units

Total Utility

Marginal Utility

1st ice cream

20

20

2nd ice cream

32

12

3rd ice cream

40

8

4th ice cream

44

4

5th ice cream

45

1

6th ice cream

45

0

7TH ice cream

42

-3

8th ice cream

40

-5
Assumptions
Law of Diminishing MU holds only under certain
conditions (assumptions) :
1.

Unit of the product s.b. standard – cup of tea,
bottle of cold drink, etc.

2.

No small units are consumed

3.

Consumer’s taste/preference must remain same
during period of consumption

4.

There must be continuity in consumption (∆t =
short)

5.

Mental condition of the consumer must remain
normal during the period of consumption

21
Limitations/Exceptions
of Law of Diminishing Marginal
Utility
(i) Case of intoxicants

(ii) Rare collection
(iii) Application to money
Conclusion
 We

can say that the law of diminishing
utility, like other laws of Economics, is
simply a statement of tendency. It holds
good, provided other factors remain
constant.
Thank you !!!

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law of diminishing marginal utility

  • 1. Managerial Economics Topic : Law of diminishing marginal utility Presented by Lipi  Neelima Singh  Shashanka Baruah  Sohini Bhuwalka
  • 2. What is Utility? -Product angle: Want satisfying property of any product (absolute). -Consumer angle: The psychological feeling of satisfaction or happiness or well being or benefit derived by the consumer by the consumption of certain units of a good or service at a certain point of time (subjective).
  • 3. Utility can be measured in two ways: -Cardinal Utility:Assigning numerical values to the amount of satisfaction -Ordinal Utility:: Not assigning numerical values to the amount of satisfaction but indicating the order of preferences, that is, what is preferred to what
  • 4. Utility is of two types: -Total Utility -Marginal Utility
  • 5. Total Utility Sum of utility derived by consumer from multiple units consumed at a point or over a period of time Example: A consumer consumes 3 units of X and derives utility u1, u2, u3 and u4 Total Utility Ux= u1 + u2 + u3
  • 6. Total Utility • The total satisfaction of wants & needs obtained from the consumption of goods & services • Based on the presumption that the amount of utility generated from the consumption of a good can be explicitly measures • Hypothetical measure is util
  • 7. Marginal Utility The change in total utility ( TU) derived from one additional unit of consumption ( X) MU = TU/ X
  • 8. Law of Diminishing Marginal Utility “As the quantity consumed of a commodity goes on increasing, the utility derived from each successive unit goes on diminishing, consumption of all remaining the same” other commodities
  • 9. When the changes in consumption are infinitely small, marginal utility is the derivative of total utility. MU = dTU/dX
  • 12. Example As an example assume you have one ice cream, 1 Ice Cream you feel Ecstatic
  • 13. You have a second Ice cream 2nd Ice Cream, u still feel Ecstatic 13
  • 14. You have the third Ice cream 3rd Ice Cream You Feel Very Happy 14
  • 15. You have the fourth Ice Cream 4th Ice Cream You Feel Happy 15
  • 16. You have the fifth Ice Cream, 5th Ice Cream You Still Feel Happy 16
  • 17. You have the sixth Ice Cream 6th Ice Cream You are not so Happy 17
  • 18. You have the seventh Ice Cream 7th Ice Cream You are not so Happy 18
  • 19. You have the eighth Ice Cream 8th Ice Cream You fall sick 19
  • 20. The following table will make the law of diminishing marginal utility more clear Units Total Utility Marginal Utility 1st ice cream 20 20 2nd ice cream 32 12 3rd ice cream 40 8 4th ice cream 44 4 5th ice cream 45 1 6th ice cream 45 0 7TH ice cream 42 -3 8th ice cream 40 -5
  • 21. Assumptions Law of Diminishing MU holds only under certain conditions (assumptions) : 1. Unit of the product s.b. standard – cup of tea, bottle of cold drink, etc. 2. No small units are consumed 3. Consumer’s taste/preference must remain same during period of consumption 4. There must be continuity in consumption (∆t = short) 5. Mental condition of the consumer must remain normal during the period of consumption 21
  • 22. Limitations/Exceptions of Law of Diminishing Marginal Utility (i) Case of intoxicants (ii) Rare collection (iii) Application to money
  • 23. Conclusion  We can say that the law of diminishing utility, like other laws of Economics, is simply a statement of tendency. It holds good, provided other factors remain constant.