The Law of Diminishing Marginal Utility

1 The Law of Diminishing Marginal Utility The utility theory is one of the most common concepts in economics. It describes how individuals make certain decisions, for instance, when to buy a particular item. According to the law of diminishing marginal utility, ceteris paribus, as consumption increases, the marginal utility one obtains from each additional unit decreases. In economics, the term utility is used to mean happiness or satisfaction (Trifu, 2020). In this paper, I will provide a better understanding of the utility theory by looking at different aspects of utility. In particular, the relationship between total utility and marginal utility will be described, diamond-water paradox examined, the law of diminishing marginal utility evaluated, some items that do not follow the law identified, and the diamond-water paradox explained using the law of diminishing marginal utility.

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2 Relationship Between Total Utility and Marginal Utility According to Amacher and Pate (2019), the correlation between total utility and marginal utility is that when total utility increases, the marginal utility declines. The two concepts normally follow opposite curves. By definition, total utility refers to the value an individual attains from the consumption of a particular quantity of a specific item. The higher the total utility an individual obtains, the greater the person’s satisfaction level. Therefore, it can be generally said that total utility is quantity-dependent.

Conversely, marginal utility refers to the changes in an individual's level of satisfaction resulting from their consumption of one more unit of a particular commodity. To better understand the concept of marginal utility, consider the following example. The consumption of 4 cans of soda gives an individual 18 units of total utility. Nonetheless, consuming the fifth can of soda may give the person 21 units of satisfaction. The implication of this is that the marginal utility of the fifth can of soda is only three units. From this point, the more the individual continues to consume the soda, the less he or she becomes satisfied. Thus, it is right to conclude that total utility is an instrumental marginal utility component. Unlike total utility, marginal utility is not quantity-dependent, given that any additional item results in less satisfaction (Amacher & Pate, 2019).

Can Marginal Utility be Negative?

The marginal utility can be positive, zero, or negative. A positive marginal utility is obtained when the consumption of more results in additional satisfaction or happiness. Similarly, zero marginal utility occurs when the consumption of more of an item results in no extra measure of happiness or satisfaction. On the other hand, negative marginal utility is achieved when satisfaction obtained is reduced for each extra item the one consumes (Amacher & Pate, 2019). It

3 occurs when there is too much of an item; hence, consuming more may prove harmful. For example, an individual may choose to buy a banana because of hunger. He or she may take 1, 2, or 3 bananas based on how hungry they are.

Nonetheless, it will reach a point where any additional banana may not make the individual any fuller. Rather, any additional banana taken after being full may make the person start getting sick. Here, the consumption of any additional banana results in negative utility. The marginal utility becomes negative when the total utility starts to decrease (Amacher & Pate, 2019).

Why are Diamonds More Expensive than Water? Diamond-Water Paradox The paradox holds that one cannot determine the price of a product based on its in-use value. Unlike diamonds, water is considered more valuable given that it can save an individual's life (Mohamed, 2018). Nonetheless, more value has been attached to diamonds because they are not readily available. Diamonds are more expensive than water because there is much supply of water and less of diamonds. Water is a vital resource that can be accessed in large quantities by individuals when needed. The cost associated with its acquisition is also relatively low. This perhaps explains why individuals use more quantities of water in watering their plants, brushing their mouths, and washing utensils than they actually need to carry out such functions.

On the other hand, diamonds are always low in supply (Mohamed, 2018). Extremely small quantities of diamonds are available in the market because of the high costs associated with mining them. Thus, people place a lot of value on diamonds not because of their usefulness but due to the fact that they come in a small supply across the world than water.

The Law of Diminishing Marginal Utility

4 The law of diminishing marginal utility holds that human beings will value a product that is in greater supply and used by many people less (Amacher & Pate, 2019). According to this law, the first unit consumed by an individual has the highest utility than any additional unit of the product consumed thereafter. However, the law makes certain assumptions that relate to a variety of issues, including consistency in the tastes of the consumer (Castro, 2019). For the law of diminishing marginal utility to stand, the tastes and preferences of the consumer must not change with the period under assessment. Nonetheless, the principle does not give an explanation of the prices of certain items, as discussed in the following section.

Items that do not follow the Law of Diminishing Marginal Utility One of the items that do not follow the law of diminishing marginal utility is knowledge.

For instance, the more skills an individual acquires, the more satisfaction he or she gets. An individual may choose to attend a conference aiming to acquire certain skills. Nonetheless, the knowledge gained from attending a single seminar may prove not to be very helpful. But, as one continues to attend additional seminars, they become more skillful in their specific study area.

Television and refrigerator are the other two items that do not follow the law of diminishing marginal utility. Both television and refrigerator are not continuous. The diminishing marginal utility law assumes that there must be continuity in consumption of the product or service under study. Thus, this assumption does not hold water given that the consumption of the two items is not continuous with regards to television and refrigerator.

Applying the Law of Diminishing Marginal Utility in the Diamond-Water Paradox According to the diamond-water paradox, the price of water is relatively low despite being obviously important to human activity. On the other hand, the price of diamonds is substantially higher despite the fact that they are much less important to human existence

5 (Mohamed, 2018). What causes them to be much more expensive than water? The law of diminishing marginal utility holds that each unit's marginal utility reduces with the increase in the supply of the concerned product. Water has a diminishing marginal utility. Many people can easily access water in large quantities according to their needs because it is readily available in wells, lakes, rivers, and taps at home. However, any additional liters of the product does not result in any meaningful value to the amount an individual already has. For instance, one additional gallon of water will not bring any meaningful value to an individual who already has 50 gallons of water.

On the other hand, any additional one ounce of diamonds can significantly increase an individual’s wealth because diamonds do not have diminishing utility. In summary, the abundance of water to individuals across the globe significantly reduces the marginal utility of water. This implies an extremely high total utility. Conversely, the marginal utility of diamonds is exceptionally high because diamonds are not available in plenty. This implies an extremely low total utility. Thus, diamonds command a high price because they have low total utility but high marginal utility. On the other hand, water commands a low price because it has a high total utility but low marginal utility.

Conclusion From the foregoing discussion, the total utility and the marginal utility follow opposite curves. The marginal utility of a product can be positive, zero, or negative. Despite water having a life-saving significance, the law of diminishing marginal revenue can be used to explain why water commands a lower price than diamonds. The diminishing marginal utility law holds that human beings will place value on a product based on its supply. Nonetheless, some products like refrigerators and television fail to follow this concept.

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7 References Amacher, R. & Pate, J. (2019). Principles of Microeconomics (2nd ed.). Retrieved from https://content.ashford.edu Castro, C. L. (2019). Marginal utility & its diminishing methods. International Journal of Tax Economics and Management, 1618(110), 35-46.

Mohamed, F. (2018). Why are diamonds more expensive than water? Retrieved from https://daily.jstor.org/diamonds-expensive-water/ Trifu, A. (2020). The Marginal Diminishing Returns/Marginal Increasing Returns in The Pursuit of Happiness. Global Journal of Management and Business Research.