The Law of Diminishing Marginal Utility in Business

Week 2

What is Marginal Utility?

The change in utility of an item as it is consumed over time.

What is an items utility?

Its ability to provide satisfying use and/or enjoyment.

What happens to an items utility over time?

Items bring owners immense utility when they are first purchased, but their value diminishes when the owner purchases more of the same item.

How would a cellphone utility diminsh over time?

A cellphone is purchased and brings the owner from a state of no mobile connectivity to a state of mobile connectivity; which is a huge leap forward.

Adding a second phone doesnt provide the same lead forward, so the marginal utilty diminishes.

What is the purpose of the Law of Diminishing Marginal Utility in Business?

A

What businesses does the law of diminshing marginal utility apply to?

To business that is closely connected to the law of demand.

What is the law of demand?

As price decreases, consumption increases and that as price increases, consumption decreases.

What can we state using converse reasoning?

When a commodity becomes more plentiful, the value of an individual unit decreases.

What concept does the law of diminishing marginal utility connect to?

Consumer’s surplus

What is the consumer’s surplus?

A consumer is generally willing to pay more for a given quantity of good than what he actually pays at the price prevailing in the market. (i.e. if a consumer sees an item on sale for less than what they were expecting to pay, they will quickly snatch it up at this lower price.)

What connection does the concept of consumers surplus place on consumers?

The mental connection between the utility that a consumer places upon a commodity and the commodity’s actual price.