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 utilization 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 utilized 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 Measurability

Marginal 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 Utility

To 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 Hypothesis

The 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 what is 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 the understanding as to 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.

FAQs (Frequently Asked Questions)

Q1. What is Marginal Utility Analysis?

Answer: As per the Marginal Utility Analysis definition, it is the analysis of the consumer’s behaviour 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.

Q2. What are the assumptions of Marginal Utility Analysis?

Answer: 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.

Q3. What is the Law of Diminishing Marginal Utility?

Answer: 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.