Law of Diminishing Marginal Utility: Concept, Applications, and Economic Implications

This presentation explains the Law of Diminishing Marginal Utility (DMU), its significance in consumer behavior, demand analysis, pricing strategies, and real-world applications. It includes graphical representations, key assumptions, criticisms, and its role in microeconomic decision-making.

1. Law of Diminishing Marginal Utility

This presentation explores the law of diminishing marginal utility. We will define utility, explore the law, and

see why it matters. By the end, you'll understand how this principle shapes economic decisions.

2. Understanding Utility
à

Utility Total Utility (TU)

Satisfaction from consuming goods or Overall satisfaction from

services. consumption.

on

Marginal Utility (MU)

Additional satisfaction from one

more unit.

3. 29

ES AA Bh ae
=> \= => \-
eo —

Marginal Utility Defined

1 | Marginal Utility (MU) 2 | Formula
Additional satisfaction from MU = TUn - TU(n-1). This
consuming one more unit. formula measures how much
additional satisfaction

3] Example

If total utility goes from 10
to 15, MU is 5.

4. The Law Explained

ak Initial Consumption

First unit provides high satisfaction

(2|— Increased Consumption

Additional satisfaction decreases.

sk Saturation

MU declines, reaches zero, then negative.

5. Key Assumptions

Rationality

Consumer behaves logically to maximize utility.

Homogeneity

Units of the good are identical

Successive Consumption

Consumption occurs continuously.

Stable Preferences

No change in consumer tastes.

6. Pizza Example

Ist Slice

Maximum satisfaction enjoyed by the user

2nd Slice

Less satisfaction experienced than before.

3rd Slice

Satisfaction continues decreasing slowly.

5th Slice

No desire to eat it anymore for the user.

7. Marginal Utility Curve

+ Marginal Utility

Marginal Utility Curve

X-axis shows quantity consumed. The Y-axis indicates marginal

5
3
=

utility. The curve slopes downward. This illustrates the law of

diminishing marginal utility.

3 4 5
Quantity Consumed

8. Total Utility vs. Marginal Utility

Total Utility Marginal Utility

Increases at a decreasing rate. It reaches its maximum. Declines as consumption increases. It becomes negative.

This is where MU equals zero This results in total utility to decline

9. Total Utility vs Marginal Utility

—e= Total Utility
m= Marginal Utility

1 2 #3 4 5 6
Quantity Consumed

Utility Curves

The total utility curve rises. Then it flattens, then declines
slowly. The marginal utility curve goes down. It also becomes

negative at the end.

10. Why This Law Matters

Decision-Making Law of Demand

EA

The law is fundamental to economics. It impacts consumer choices. It is essential for demand analysis. It also

informs pricing strategies.