Economics (NCERT) Notes

2.2 Law of Diminishing Marginal Utility

Law of Diminishing Marginal Utility
•The marginal utility diminishes with increase in consumption of the commodity.
•This happens because having obtained some amount of the commodity, the desire of the consumer to have still more of it becomes weaker.
•Law of Diminishing Marginal Utility states that marginal utility from consuming each additional unit of a commodity declines as its consumption increases, while keeping consumption of other commodities constant.

Values of marginal and total utility derived from consumption of various amounts of a commodity

The values of marginal and total utility

Demand
•The quantity of a commodity that a consumer is willing to buy and is able to afford, given prices of goods and income of the consumer, is called demand for that commodity.
•Demand for a commodity x depends on factors like,
•the price of x,
•prices of other commodities which can be its substitutes or complements,
•income of the consumer and
•tastes and preferences of the consumers.

Demand curve

•Demand curve is a graphic presentation of various quantities of a commodity that a consumer is willing to buy at different prices of the same commodity, while holding constant prices of other related commodities and income of the consumer.
•Figure presents hypothetical demand curve of an individual for commodity x at its different prices.

Law of Demand
•At lower prices, the individual is willing to buy more of commodity x;
•At higher prices, she is willing to buy less of commodity x.
•Therefore, there is a negative relationship between price of a commodity and quantity demanded.
•This is referred to as the Law of Demand.
•An explanation for a downward sloping demand curve rests on the notion of diminishing marginal utility.

Explanation
•The law of diminishing marginal utility states that each successive unit of a commodity provides lower marginal utility.
•The marginal utility diminishes with increase in consumption of the commodity.
•Therefore, the individual will not be willing to pay as much for each additional unit and this results in a downward sloping demand curve.
•Hence, the law of diminishing marginal utility explains why demand curves have a negative slope.

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