The Law of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility

ECO 204 Principles of Microeconomics

The Law of Diminishing Marginal Utility

Many prominent economists have tried to answer the same simple question, why are necessary natural resources, like water, consistently undervalued, while items such as diamonds are usually in high demand with a very high price tag. The law of diminishing marginal utility states, “…all else equal as consumption increases the marginal utility derived from each additional unit declines. Marginal utility is derived as the change in utility as an additional unit is consumed.” (Kenton 2019) The word utility used in this way means using the item or the satisfaction of using an item such as water/diamonds. Throughout this essay, we will examine a few topics; I will begin by describing the relationship between total and marginal utility; explain if marginal utility can be negative; examine the diamond-water paradox more closely; then finally evaluate the law of diminishing marginal utility while providing examples then explaining how the law of diminishing marginal utility can explain the diamond-water paradox.

Describe the relationship between total utility and marginal utility.

While the total and marginal utility is different, they use the same set of metrics. Total and marginal utility is measured by an arbitrary unit called the util. Utils were designed to only measure a single consumer’s use. The authors of Principles of Microeconomics, Amache, and Pate claim, “Such comparisons between people are inappropriate because the numbers of utils is a subjective measure of a certain individual’s satisfaction and as such is not subject to meaningful comparisons.” (Amacher and Pate 2019, Ch.5.1) The total utility can be measured by using utils for an individual consumer.

Marginal utility seeks to derive the greatest satisfaction from each unit by adding or subtracting one from the total utility which represents the change in satisfaction from one more or one less unit consumed. Diminishing marginal utility occurs, “As you consume more units of a good, the later units yield less of addition to total utility than the preceding units did.” (Amacher and Pate 2019, Ch5.1) So, marginal utility is the knowledge of how much more or less satisfaction is gained from consuming one more or one less of a good.

Explain if the marginal utility can be negative.

The marginal utility can be negative if the utility curve has reached its maximum. Once the curve reaches zero for marginal utility, then the following units consumed will contribute negatively to marginal utility, which will also decrease total utility. Decreasing the total utility will overall diminish the consumer’s satisfaction.

Examine the diamond-water paradox. Why are diamonds more expensive than water?

According to Amacher and Pate, “The diamond-water paradox argues that the value in use cannot determine the price. Diamonds, for example, are arguably less useful than water but are more expensive than water.” (2019 Ch.5.1) While demand theorists utilize the notion of utility, which is when a consumer wants a good or service it means it has utility for that individual. Diamonds are more expensive than water since the consumers that want diamonds are willing to pay more for them.

Evaluate the law of diminishing marginal utility.

Diminishing marginal utility occurs when an individual gains more or less satisfaction from consuming one more or less of the item being measured. Once the total utility is established, the marginal utility can be gleaned by dividing the change in total utility by a one-unit change in the quantity consumed.

Identify some items, explaining your reasoning, that do not follow the law of diminishing marginal utility.

I like the example provided by Amacher and Pate, Cans of soda pop. Per total and marginal utility, Table 5.1 in Principles of Microeconomics shows that one can of soda a day provides the greatest amount of satisfaction. Once a consumer uses eight or more cans of soda a day, the satisfaction gained from use diminishes greatly, even to the point of a negative return. This example provides a normal item that fits within the scope of diminishing marginal utility. An item that defies diminishing marginal utility, would be a television. Once a consumer purchases a TV, the device can be used for enjoyment for many hours after the purchase date with seeming identical satisfaction after each use.

Evaluate how the law of diminishing marginal utility can explain the diamond-water paradox.

The diminishing marginal utility could help explain the diamond-water paradox since water once used is spent and would need to be replenished just like the can of soda previously mentioned. However, the diamond can be used over and over again, and can even be reset into newer jewelry giving it a refreshed look, the diamond is similar to the Television I previously mentioned. A diamond can be used many times and seemingly get the same if not better satisfaction after each use.

The diamond-water paradox is, at first, a difficult concept to grasp. Understanding the relationship between total and marginal utility is critical to understanding the diamond-water paradox. Then understanding how diminishing marginal utility can help explain why diamonds are more expensive than water. Diamonds are a girl’s best friend, has anyone ever said anything so endearing about water?

Resources

Amacher, R. and Pate, J. (2019). Principles of microeconomics (2nd ed.). Retrieved from https://content.ashford.edu

Investopedia. (2020, February 5). The Effect of Externalities on Equilibrium and Market Failure. Retrieved from https://www.investopedia.com/ask/answers/051515/how-do-externalities-affect-equilibrium-and-create-market-failure.asp

Kenton, W. (2020, January 29). Law Of Diminishing Marginal Utility. Retrieved from https://www.investopedia.com/terms/l/lawofdiminishingutility.asp

Law of Diminishing Marginal Utility (Limitations and Exceptions). (2015, August 11). Retrieved February 21, 2020, from http://www.economicsdiscussion.net/consumer/law-of-diminishing-marginal-utility-limitations-and-exceptions/3481

Mohammed, F. (2018, February 12). Why are diamonds more expensive than water JSTOR Daily? Retrieved from https://daily.jstor.org/diamonds-expensive-water/ EnhanceTuition. (2017, November 15). Diminishing marginal utility and the demand curve