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Marginal Utility Analysis

Last updated date: 27th May 2024
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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— 

  1. Consumer theory

  2. Utility maximizer

  3. Total utility 

  4. Law of diminishing marginal utility 

  5. 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–

  1. Human wants are unlimited since a human can never be truly satisfied. 

  2. Every want has a different kind of intensity and need of goods and services.

  3. Human wants are never constant. They are ever-changing with several factors such as changes in lifestyle and economy, or time. 

  4.  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– 

  1. 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. 

  2. 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. 

  3. 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–

  1. A student must focus on creating the right format while creating the answers. 

  2. A student must refer to the notes regularly in order to memorise the topic by heart. It will help the students during exams. 

  3. A student must solve the calculations regularly to stay in touch with this topic.

  4. 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. 

  5. 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

1. What is Marginal Utility Analysis?

As per the Marginal Utility Analysis definition, it is the analysis of the consumer’s behavior in the allocation of his or her stock money in the consumption of different products. It considers a single unit of every product as an individual entity. It is different from the total utility, and both the utilities are important to study. Where marginal utility considers the utility related to individual units of a product, total utility considers all the units of the product. Therefore, total utility is considered as the sum of all marginal utilities related to the consumption of a particular product by the consumer.

2. What are the assumptions of Marginal Utility Analysis?

The marginal utility analysis theories consider a few assumptions. They consider marginal utility to be measurable and quantifiable, that is, a cardinal concept. This enables the user to compare the utility between different commodities and make an intelligent decision on which one to go for. It also considers money as the basis of such measurements. The marginal utility is also considered to be constant in terms of money. Moreover, the independent utility hypothesis related to marginal utility does not consider the complementarity factor between different commodities. The total utility is the sum of all the individual utilities related to each commodity.

3. What is the Law of Diminishing Marginal Utility?

The law of diminishing marginal utility is an essential law of marginal utility analysis. It states that as the consumption of the units of a product increases, the demand for such an increase decreases. Such a law is based on the norms of human nature, which states that the desire for a particular product decreases with increased consumption of it. Although the marginal utility value decreases, the total utility does not get affected by it. The total utility can increase although the marginal value decreases. If the total value becomes maximum, the marginal utility value becomes zero. A decrease in total utility pushes the marginal utility value to negative.