Economics Marginal Utility Questions Long
The marginal utility theory explains the law of diminishing marginal utility by stating that as an individual consumes more and more units of a particular good or service, the additional satisfaction or utility derived from each additional unit decreases over time.
According to the theory, individuals have a limited amount of resources, such as time and money, which they allocate towards the consumption of goods and services. As they consume more of a particular good, the initial units provide a higher level of satisfaction or utility, as they fulfill the most urgent needs or desires. However, as more units are consumed, the marginal utility, or the additional satisfaction gained from each additional unit, starts to diminish.
This diminishing marginal utility occurs due to several reasons. Firstly, individuals have limited needs and wants, and as they consume more of a good, the additional units may not be as necessary or desired as the initial units. For example, if a person is hungry, the first slice of pizza consumed will provide a high level of satisfaction. However, as they continue to eat more slices, the additional satisfaction gained from each slice will decrease, as they become less hungry.
Secondly, the law of diminishing marginal utility is also influenced by the principle of diminishing marginal rate of substitution. This principle states that as individuals consume more of a particular good, they may start to substitute it with other goods that provide a higher level of satisfaction. For instance, if a person consumes multiple cups of coffee, they may reach a point where the marginal utility of each additional cup decreases, and they may start to substitute it with other beverages like tea or juice.
Lastly, the law of diminishing marginal utility is also influenced by the concept of satiation. Satiation refers to the point where an individual's desire or satisfaction for a particular good is fully satisfied. As individuals consume more units of a good, they may reach a point of satiation where the additional units do not provide any additional satisfaction or utility.
Overall, the marginal utility theory explains the law of diminishing marginal utility by highlighting that as individuals consume more of a particular good, the additional satisfaction or utility derived from each additional unit decreases due to limited needs and wants, the principle of diminishing marginal rate of substitution, and the concept of satiation.