Notes on Marginal Utility Analysis
Marginal utility analysis focuses on understanding the consumer’s behaviour in allocating his expenditure on different goods and services for the maximum utilisation of the available resources. To delve more into the topic, let us first understand the marginal utility analysis definition.
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What is Marginal Utility Analysis?
To understand the concept of the marginal utility analysis, we need to focus on the following two points.Total utility refers to the sum of all the marginal utilities associated with different units of any commodity utilised by the consumer. Total utility is also known as full satiety.Marginal utility refers to the utility related to any additional component of the commodity. Individual marginal utility contributes to the total utility.
Assumptions of Marginal Utility Analysis
There are certain assumptions of marginal utility analysis. Cardinal MeasurabilityMarginal utility is considered to be a cardinal concept, i.e., it is quantifiable and measurable. If you derive different utilities from consuming variable units of separate commodities, then you can compare the commodities and select the one which provides better satisfaction and rate of utility. The theory also considers money as the means to measure utility. The utility derived from a given commodity is the amount spent on that commodity instead of going against it. Constant Nature of Marginal UtilityTo facilitate marginal utility analysis on a particular commodity in the terms of money, it is important to assume that the marginal utility remains constant. Independent Utility HypothesisThe independent utility hypothesis considers that the total utility is the sum of all the separate utilities of each commodity. It does not take into consideration the complementarity that exists between different commodities.
Diminishing Marginal Utility Law
The diminishing marginal utility law is an important law of marginal utility analysis. The British economist Alfred Marshall puts forward the diminishing marginal utility analysis definition as the additional profit, associated with an increase in the stock of a commodity, decreases with the increase. Such a law was based on the human nature of unlimited demands. As more and more units are consumed, the intensity of our desire decreases to a point when we no longer desire it. Therefore, the extra benefits associated with the consumption of surplus units of any product decreases as the consumption of the product increases. However, it must be kept in mind that although the marginal utility decreases with increasing stock, the total utility does not decrease.
Correlation Between Total Utility and Marginal Utility
If you have understood marginal utility analysis, then you will be able to denote the correlation between total utility and marginal utility. The following points will define such a relationship. The total utility can rise although if the marginal utility decreases.If the total utility has reached the maximum value, marginal utility is equal to zero. If the total utility decreases, the marginal utility value tends to be negative. Such a correlation helps in understanding why a consumer can reach the equilibrium state for a single commodity. The consumer generally uses the commodity until its value matches the market price. This will enable the complete utilization of that product. In case of a decline in the commodity price, the consumer increases the consumption of that product to a point where the marginal value has declined to the equilibrium state. If the commodity price rises, the consumer will decrease the consumption so that the equilibrium is maintained.
Limitations of the Law of Diminishing Marginal Utility
There are certain limitations to the law. It is based on certain assumptions as follows.
Homogeneous Units: The different units of products and the attributes of the consumer like temperament, taste, income, etc. are identical at all times.
Standard Consumption Units: The consumption units are considered to be standard units. For example, the unit for water consumption will always be a glass.
Continuous Consumption: The consumers continuously consume the units of the product without any gap in between. The Law cannot be applied to
Prestigious Goods: The law does not take prestigious goods into consideration since the increase in stock increases the demands.
Related Goods: The utility of any product is related to the presence or absence of a related product. For example, your tea consumption can be less in the absence of sugar.
Tips for Students to Understand Marginal Utility Analysis
Understanding Consumer behaviour is beneficial for a commerce student and it must not mix the difference between the Marginal Utility and Total Utility. In order to avoid the peril, here are some of the tips and tricks that a student must bear in mind in order to receive a better understanding regarding this topic on Vedantu and prepare for the final exams.
A student must be acquainted with the key terms of the topics along with the definitions so that it does not get confusing for the students to understand the concept of Marginal utility analysis in detail.
Some of the key terms of marginal utility are mentioned below—
Consumer theory
Utility maximizer
Total utility
Law of diminishing marginal utility
Utility
A student must be aware of the nature of humans and want to delve deeper into this chapter. Here’s a quick recap of the nature of human wants–
Human wants are unlimited since a human can never be truly satisfied.
Every want has a different kind of intensity and need of goods and services.
Human wants are never constant. They are ever-changing with several factors such as changes in lifestyle and economy, or time.
Human wants can transform into customs and needs.
A student must be aware of the classifications of human-wants. Some of the key classifications are listed below for a better understanding of students–
The first classification of human-wants fall under the necessities. These include goods that are essential for the sustenance of humans in society such as food, water, clothes, etc. They are absolute and essential for any human for basic survival so they never go out of the market.
Comforts are the second classified human wants. These are the goods and services that are required to make human life easy and smooth. After the basic wants are met, a human wants to be satisfied. These are not as important as the necessities but they are present in the market. For example, goods like fans, furniture, etc fall under this category of human wants.
The third classification of human wants is known as luxuries. This category includes the goods and services that are essential for the pleasures of a human in society. Human wants bring acceptance and prestige to humans at large. It includes cars, diamond jewellery, an air conditioner, etc.
After understanding the nature of the human wants as well as the key terms, the student must memorise the key calculations regarding marginal utility correlating to total utility.
Concepts can be altered according to the income of an individual since an increase and decrease in income directly affects the consumption of goods and services by an individual and the relation between the income of an individual and change in income of humans is known as marginal utility. It is a significant topic in commerce that has to be understood in depth by the student so as to secure better marks in exams.
Vedantu provides solutions to this topic on the official website and mobile application. A student can easily learn about the marginal utility analysis and other chapters that are curated by the experts here at Vedantu.
There are chapter-wise solutions provided by Vedantu regarding class 11 and 12 commerce that can be downloaded by the website in PDF format anywhere and any time.
A student must refer to the right topics and study materials when studying marginal utility and commerce in general. Here are some tips that will help a student in preparing for marginal utility–
A student must focus on creating the right format while creating the answers.
A student must refer to the notes regularly in order to memorise the topic by heart. It will help the students during exams.
A student must solve the calculations regularly to stay in touch with this topic.
Vedantu offers practice questions as well as important questions regarding this topic so students can cover this extensive topic and prepare for the exams at ease and with confidence.
A student should refer to the notes and create their own notes that can be referred to during the exams.
A student must understand and remember the formulas right away. Vedantu provides study materials on this topic that makes it easy for the students to memorise the formulas of marginal utility and live doubt solving sessions make it easier for students to prepare for the final exams.
FAQs on Marginal Utility Analysis: A Comprehensive Guide
1. What is marginal utility analysis in Economics?
Marginal utility analysis is a fundamental concept in consumer behaviour theory that examines the additional satisfaction or benefit (utility) a consumer gains from consuming one more unit of a good or service. It helps in understanding how consumers with limited income allocate their expenditure to maximise their total satisfaction. The core idea is that the utility from each additional unit consumed tends to decrease.
2. How is marginal utility different from total utility?
The key difference lies in what they measure:
- Total Utility (TU) refers to the overall satisfaction a consumer receives from consuming all units of a particular good or service. It is the sum of all marginal utilities.
- Marginal Utility (MU) refers to the additional satisfaction gained from consuming just one more successive unit of that same good or service.
3. What is the Law of Diminishing Marginal Utility, with an example?
The Law of Diminishing Marginal Utility states that as a consumer consumes more and more units of a specific commodity, the additional utility derived from each successive unit goes on decreasing. For instance, the first glass of water on a hot day provides immense satisfaction (high MU). The second glass provides less satisfaction than the first, and the third even less. Eventually, the consumer reaches a point where an additional glass offers no extra satisfaction (MU is zero) or could even make them feel worse (negative MU).
4. How do you calculate marginal utility?
Marginal utility is calculated as the change in total utility divided by the change in the number of units consumed. The formula is:
MU = ΔTU / ΔQ
Where:
- MU is Marginal Utility.
- ΔTU is the Change in Total Utility (TU of the current unit minus TU of the previous unit).
- ΔQ is the Change in Quantity Consumed (which is typically 1 unit).
5. What are the key assumptions behind marginal utility analysis?
Marginal utility analysis is based on several key assumptions to hold true:
- Cardinal Measurability: It is assumed that utility can be measured in numerical units, often called 'utils'.
- Constant Marginal Utility of Money: The utility derived from a unit of money is assumed to remain constant, regardless of a consumer's income level.
- Independent Utilities: The utility of a commodity is assumed to be independent of the consumption of other goods.
- Continuous Consumption: It is assumed that the units of the commodity are consumed in quick succession without a significant time gap.
6. How does the relationship between total utility and marginal utility explain a consumer's equilibrium?
The relationship between Total Utility (TU) and Marginal Utility (MU) is crucial for identifying a consumer's point of maximum satisfaction, or equilibrium.
- When MU is positive, TU increases, meaning each additional unit adds to total satisfaction.
- When MU is zero, TU is at its maximum. This is the saturation point, where the consumer has no desire to consume more of the product.
- When MU becomes negative, TU starts to decline. Consuming more at this stage leads to dissatisfaction (disutility).
7. Can marginal utility be negative, and what does it imply about consumer choice?
Yes, marginal utility can become negative. This occurs when consuming an additional unit of a good or service actually decreases your total satisfaction, leading to disutility. For example, after eating several slices of cake, consuming one more slice might make you feel sick. This negative marginal utility signals that a rational consumer should stop consumption. It practically defines the limit of consumption and explains why people do not consume goods infinitely, even if they are free.
8. Why is understanding the limitations of the Law of Diminishing Marginal Utility important for economic analysis?
Understanding the limitations is critical because it defines where the theory may not apply, ensuring more accurate economic analysis. For instance, the law often does not apply to:
- Prestige Goods: For items like diamonds or luxury cars, the desire may increase with more units.
- Addictions: For addictive substances, the urge for the next unit may be stronger, not weaker.
- Knowledge and Hobbies: The desire to acquire more knowledge or collect items (like stamps) often grows with each new acquisition.
