Managerial Economics laws of Marginal Utility

law of diminishung marginal utility

1. Concept of Utility Utility is the satisfaction or pleasure from consuming goods or services. It is subjective and varies from person to person. Even harmful goods can have utility if they satisfy wants.

2. Types of Utility Form Utility – Created by changing the form of goods. Place Utility – Created by moving goods to where they are useful. Time Utility – Created by making goods available when needed. Possession Utility – Created by ownership transfer. Service Utility – Created through service performance.

3. Law of Diminishing Marginal Utility As more units of a good are consumed, additional satisfaction decreases. Example: First glass of water gives more satisfaction than the next. TU increases at a decreasing rate; MU becomes zero or negative.

4. Illustration Units: 1st–7th | TU: 10,18,24,28,30,30,28 | MU: 10,8,6,4,2,0,-2 TU rises then falls, MU declines and turns negative. Explains consumer equilibrium and rational consumption.

5. Assumptions & Applications Assumptions: Rational consumer, Homogeneous goods, Constant utility of money. Applications: Basis for Law of Demand, Progressive Taxation, Public Finance.

6. Exceptions & Conclusion Exceptions: Addictive goods, Rare collections, Changing tastes, Variety in consumption. Conclusion: As consumption increases, satisfaction decreases, forming demand basis.