UTILITY AND LAW OF DIMINISHING MARGINAL UTILITY

Utility

         It’s the satisfaction of people derived from their consumption of goods in a particular period of time.

Utility is subjective concept and it varies from people to people and time to time. The utility of a particular good is going to influence the demand and also price.util is the measure of utility.

For example a person evaluates that a piece of pizza will give 15 utils where as the bowl of oats will give 20 utils then that person knows that eating of oats is more satisfying. From producer side they may increase the price of oats slightly higher than pizza.

Marginal utility

Marginal utility is defined as the change in utility when extra unit is consumed.

For example if the utility of first piece of cake has 10 utils and second piece has 7 utils, the marginal utility(mu) of eating the second piece is 7 utils.

And also consumers are not identical the rate at which marginal utility diminishes is depends upon individual taste and preferences.

Law of diminishing marginal utility

Suppose a person wants to eat 5 apples one by one. The first apple gives him 15 utils and when he eats second apple it gives him 12 utils. When he consumes third and fourth apple, the marginal utility of each extra apple he eats will be lesser. With the increase in consumption of apples, the consumer wants fall.

               The law of diminishing marginal utility derives that as the usage of the goods rises, the utility derived from each extral unit decreases.