Limit utility, the law of diminishing marginal utility. The laws of economics

Not only in economic theory, but in life we often encounter such a notion as marginal utility. The law of diminishing marginal utility is an illustrative example of the fact that a good value is valued only when it is small. Why this happens and what is being discussed, we will consider further.

What is marginal utility

Let's first understand what utility in general is. When we go to the store, we evaluate any product in terms of the need for it. If we need bread, we go to the appropriate department. But there is a great choice: white, black, with sesame, with bran. Now we value the product in terms of utility for us. So in the economy the usefulness of an object is explained, or, in other words, it is the degree of satisfaction of the needs of the individual.

But how many loaves of bread do you buy at a time? One? Two? Well, a maximum of three, and then if you have a large family. What kind of satisfaction do you get from the first loaf? You probably eat a few slices with an appetite, then a few more to eat. Will you cut the second loaf? Probably not, because you are full. This is the ultimate utility. The law of diminishing marginal utility says that with every new consumed portion you get less and less enjoyment.

One more example

The rule is applicable to any sphere of life. Here is another very good example. Suppose you have all your life dreamed of a radio-controlled helicopter. This was learned by all your friends and decided to make a birthday present. The first guest came and presented a long-awaited toy. You will surely be in seventh heaven with happiness. Then came a second friend and also gave a similar model. You are happy, but not so, because you do not need a second helicopter. But then another 10, 20 guests came and all presented the same toy. Will you be happy with all the other gifts?

This is how utmost utility is expressed. The law of diminishing marginal utility is always relevant and under any circumstances. There is even a well-known proverb: "a good little by little."

Total Utility Graph

We have considered the concept of marginal utility. The law of diminishing marginal utility can not be understood without considering two graphs. The first concerns the overall utility and looks as follows.

The vertical axis shows the overall utility, which is the aggregate satisfaction of all consumed goods. Suppose one lunch consisting of 2 dishes brings the total utility of 4, as shown in the graph (Q - the amount of consumed goods). The general utility has the property of growing to a certain point, when saturation occurs.

Schedule of marginal utility

Now consider the effect of the law of diminishing marginal utility. Recall that in economic theory marginal utility is explained as satisfaction from one additional unit of good. That is, the option is considered when a person has already been satisfied, and how much he will enjoy after using each successive unit of good. If you think logically, then the marginal utility function in this case should have a decreasing character, which we see in the figure.

The wording of the law

So, summarizing all of the above, we conclude. The law of diminishing marginal utility means that as the use of the quantity of units of one or another good increases, the general utility increases, but to a very small extent, and the marginal utility decreases.

In other words, the law reflects the relationship between how many units of good the individual has used and how much pleasure he has received from it. For the first time this theory was considered by German scientist Hermann Gossen, and therefore the second title of the postulate is Gossen's first law.

Dependence of demand on prices

The law of diminishing marginal utility has great practical significance. The economy considers it from the point of view of significance for consumer demand. How does the total and marginal utility affect the quantity of goods purchased? Thanks to this analysis, it is possible to regulate prices and force people to take more than they expect. Let's consider a concrete example.

Let's say we need apples. For an individual customer, their value will be expressed by the data given in the table.

And now we will express these data, but taking into account the money spent for the purchase.

Data analysis

In the first table, we see how marginal utility changes. The law of diminishing marginal utility is shown here as well as possible. The more apples we buy, the less pleasure we get from each extra unit eaten.

In monetary terms, the situation is repeated. We will buy five apples, they will be useful for us in general, but we will regret that we bought so much, because this money could be spent on something else. Thus, marginal utility in monetary terms will also decrease.

How will marginal utility change when price changes

We have already determined that the law of diminishing marginal utility means that with each new unit of commodity its utility will decrease. The same happens and depending on the price of the goods. Let's say one apple from the previous example will cost 5 rubles. If the consumer buys one piece, then his overall and marginal utility will be equal. He does not suffer losses, and in other words, what he expects, he pays for it.

But what happens if he wants to buy a second apple? The utility of money will remain at the level of 5 rubles, but the utility from the purchase will already decrease and equal 4. Lost 1 ruble loss. Now the consumer thinks about whether he needs two apples, if he loses twice as much money, but does not get useful?

And if you reduce the price of apples, let's say not 5, but 4? The first apple will bring additional usefulness, which means that it will be transferred to the second apple. But the third will already be at a loss. Let's construct a graph of the dependence of consumption on the price level.

In this case, the marginal utility line (marked in red) is the demand line. The lower the price, the more likely that the consumer will buy more goods, even if its utility will not be of particular value.

Practical use

In practice, we are faced daily with examples of price reductions to meet consumer desires. Remember how often in the store you see the action: "Two for the price of one"? Acting in this way on consciousness, smart marketers, using the law of diminishing marginal utility, make us buy more, without thinking, whether we need this product or not.

Most often, the principle of diminishing marginal utility is good for goods of everyday use: household chemicals, food. Here it can still be assumed that the utility from the additional unit will have a low value. But the same clothes just will not give anyone the proper benefit. Well, why would a girl have two identical blouses? And the girlfriend will not give, because they will look like. But all the same, having seen the tempting offer, we in most cases, without hesitation, give blood rubles.

conclusions

So, it's time to sum up some results.

1. In order to properly study the demand, it is necessary to take not a set of goods and consumers, but a specific individual and his attachment to a certain commodity. So the notion of utility is defined. The law of diminishing marginal utility will be calculated as accurately as possible.
2. At the heart of the behavior of any person in the market or in the store is his idea of the usefulness of the product. At everyone it can be different.
3. Demand in its essence is completely based on the law of diminishing marginal utility.