Essay The Law of Diminishing Marginal Utility
Amache and Pate (2019) defines utility as the satisfaction that individuals derive from utilizing a specific good. The utility level varies from one person to another for each unique commodity and there is no distinct measuring unit for utility because it is unique for everyone. However, sometimes scholars use a temporary unit called util as a unit of measure for utility (Farah, 2018). While measuring utility, it is challenging to compare different levels of utils since they only measure an individual’s satisfaction level and because everyone prefers different commodities, scholars do not use utils as subjective measures for individual fulfilment. Therefore, the utility function serves as a link that demonstrates a person’s desire to consume varying amounts of a specific commodity. Marginal utility refers to the amount of utility that the quantity a person uses, increases or subtracts from the total utility. Marginal utility is the change a person experiences with fulfilment by consuming one more or one less unit of a particular good. This paper discusses the “diamond-water dilemma” from the marginal utility principle perspective.
Transformational Leadership Analysis
The Association between Marginal and Total Utility
Amacher & Pate (2019) posit that every consumer commodity possesses utility. Considering a situation where a person buys cans of soda, the buyer receives the soda in increasing units starting from one to a particular number. As such, two soda cans have greater utility than one can while three have greater utility than two and so on. As the consumer continues to select more cans of soda, their order of utilities reduces. Therefore, from this estimation, the first can of soda has the greatest utility, where the buyer receives a total satisfaction of 20 utils according to Farah (2018). The second can of soda will follow in satisfaction level but will have a minimized utility amount compared to the first one, which Farah (2019) records as 18 utils. The third can will contain 16 utils while the fourth 13 utils.
The total utility will be the aggregate amount of utility that the consumer derives from the four cans of soda amounting to 67 utils. On the other hand, marginal utility is either the difference or sum from the aggregate utility when the consumer adds or reduces an extra unit of the same commodity. Following the discussed example, the aggregate utility for two soda cans is 38. As the consumer consumes the third can the total utility reaches 54, resulting in a marginal utility of 16 (54-38). Therefore, marginal utility is the change in aggregate utility resulting from consuming an additional unit of a commodity. If the marginal utility has a positive value, the aggregate utility increases at a reducing rate. If the marginal utility has a zero value, the total utility has reached the saturation point or is at maximum. On the other hand, if the marginal utility has a negative value, the total utility reduces.
Explain if the Marginal Utility can be Negative
Yes, the marginal utility can have a negative value because total utility reduces as a person consumes an additional unit of a specific commodity implying that the more a person consumes an extra unit, the lesser the utility gained.
The Diamond-Water Paradox
The diamond-water paradox posits that water has a lesser value than diamond notwithstanding the significance of water to human life (Amacher & Pate, 2019). Compared to water, diamonds are less essential than water in human sustenance and humans can survive without diamonds. However, according to the paradox, diamonds are much more expensive. According to Farah (2018), a person derives more utility when consuming water than consuming diamonds. The diamond-water paradox answers the question of why diamonds are more expensive than water yet water is essential to life. Evaluating the differences between marginal and total utility can provide this explanation.
The aggregate utility is the total utility a person gets from consuming certain amounts of a specific commodity whereas marginal utility is the excess satisfaction a person derives from consuming an extra unit of the same commodity (Amacher & Pate, 2019). Even though diamonds have a cultural significance, they are useless functionally. Water is essentially readily available whereas diamonds are scarce making their intrinsic value secondary to the subjective value society assigns them (Goetz, 2013). Most people live their entire lives without experiencing the satisfaction from consuming diamonds and yet diamonds have a higher utility because of their scarcity and prestige. Therefore, diamonds have a higher marginal utility compared to water because of their scarcity. The more diamonds a person consumes, the higher the total and marginal utility due to their perceived value.
The Law of Diminishing Marginal Utility
The law of diminishing marginal utility implies that when individuals consume more of a commodity for a particular period, its marginal utility continues to decline (Lin & Peng, 2019). The marginal utility of consuming an extra unit of a specific product reduces when the total utility reaches a saturation point. For example, when a person starts eating the first apple, the total utility continues to increase but at a reducing rate with more consumption. However, when the person becomes full, eating an additional apple may lead to a stomach ache thereby reducing the marginal utility and hence the total utility. The person no longer desires to eat another apple.
Items that do not follow the Law of Diminishing Marginal Utility
Some commodities do not follow the law of diminishing marginal utility. This law does not apply to addictive drugs. The reason is that the marginal utility for items like alcohol and drugs increases because their additional intake provides more satisfaction. Equally, people with drug addiction and alcohol problems are irrational consumers. Such consumers receive higher marginal utility from consuming more alcohol or drugs.
The other item is money. This law does not apply to money because the more money a person obtains, the more they want. The law of diminishing returns assumes that income is constant. In reality, as a person’s income increases, so does their marginal utility for consuming more. Lastly, the law does not apply to heterogeneous goods. These commodities have dissimilar attributes like size, content, and scope. For instance, considering books and songs, individuals will listen and read different genres of songs and books. As such, the marginal utility increases for these goods because people desire to listen to and read new things.
How the Law of Diminishing Marginal Utility can explain the Diamond-Water Paradox
The law of diminishing marginal utility implies that the higher the supply of a commodity and the more individuals consume it, the lesser people value it. When individuals consume more of a commodity for a particular period, their marginal utility continues to decline. The law of diminishing marginal utility can help explain the diamond-water paradox. Sometimes, the utility of a particular commodity cannot determine its price because of factors such as scarcity and prestige. The total utility of water is high because of its significance to human life. However, because water is plentiful and widely used, it has a reduced marginal utility (Farah, 2018). Contrastingly, diamonds have a reduced total utility when consumed, but their scarcity and prestige increase their marginal utility. Therefore, marginal utility determines the price of a good whereas the total utility demonstrates the usage value. The cost of a product is its exchange value and is associated with shortage through utility. As such, diamonds have an increased value due to their rarity making them more expensive than water.
Conclusion
The diminishing marginal utility law is important in underscoring the consumer preferences. It states that when consumption increases, satisfaction is likely to reduce especially fir every successive unit of the good by considering that the consumption of other goods is kept constant. This task has critically evaluated the association of marginal utility and total utility especially in its application in the diamond water matrix. From the analysis, the task demonstrates that the utility function serves as a link that demonstrates a person’s desire to consume varying amounts of a specific commodity. Furthermore, since total utility reduces as a person consumes an additional unit of a specific commodity, marginal utility can at times be said to be negative. The diamond-water matrix demonstrates that a person finds greater utility in what they use often than what is rarely used. The law is thus key as it indicates that the higher the supply of a commodity and the more individuals consume it, the lesser people value it.
