Exploring the Law of Diminishing Marginal Utility in Consumer Behavior

This essay delves into the law of diminishing marginal utility, a fundamental concept in economics explaining how the satisfaction derived from consuming an additional unit of a good decreases as consumption increases. It explores the relationship between total and marginal utility, explaining how marginal utility can become negative. The essay uses examples like the consumption of apples and oranges to illustrate the concept. It then analyzes the diamond-water paradox, discussing how the law explains why diamonds, with lower utility, can be more expensive than water. The essay further evaluates the law's advantages in helping consumers make rational choices and identifies items, such as gold and knowledge, that may not follow the law. Finally, it applies the law to the water and diamond paradox, explaining the valuation of goods. References from economic literature are included.

Running head: LAW OF DIMINISHING MARGINAL UTILITY
Law of Diminishing Marginal Utility
Name of the Student
Name of the University
Author Note

1LAW OF DIMINISHING MARGINAL UTILITY
Relationship between total utility and marginal utility
Commodities are purchased by the individuals based on their utility to such consumers.
Furthermore, the consumer keeps on purchasing the concerned commodity till his or her utility
has been fulfilled (Kauder, 2015). For instance, when an individual is hungry, she might prefer to
consume apples. After the consumption of one apple, she might still feel hungry and consume
one more apple. The satisfaction derived from the second apple is greater than that derived from
the first apple. However, when a third apple is consumed, the satisfaction falls (Kushlev et al.,
2018). The utility derived from each additional unit of apple is known as marginal utility. On the
other hand, total utility refers to the cumulative utility derived from the consumption of all the
units of the apple at the end. This shows the relation between total utility and marginal utility.
Explain if marginal utility can be negative
The law of diminishing marginal utility states that with the consumption of each
additional unit of product, the utility gained from each unit decreases (Tan & Zhang, 2015). This
can be explained with the help of an example. For instance, when an individual is hungry, he
might consume an orange. The satisfaction derived from the first unit of orange may be very
high. The consumption of second unit of orange can further provide more satisfaction to the
consumer. However, as he keeps on consuming the oranges, he stops feeling hungry and a point
s reached when he is completely satiated. After the consumption of that final unit of orange
which completely quenches the hunger of the individual, the consumption of anymore orange
will have a negative impact on the individual. As a result, there is a possibility that marginal
utility can be negative in nature (Becker, 2015). During such a scenario, the consumption of each
additional unit of orange will provide dissatisfaction to the consumer. This decreases the

2LAW OF DIMINISHING MARGINAL UTILITY
marginal utility that is derived from the product and the marginal utility becomes negative in
character.
Diamond Water paradox
The diamond water paradox was explained in detail by Adam Smith. According to Smith,
there are two kinds of goods, one which has value in use and the other which has a value in
exchange (Rachlin et al., 2015). Often, these two values occur in isolation to each other. In this
sense, it can be observed that water has the greatest value in use. However, the price of water is
considerably less than the other commodities in the market. On the other hand, the value of
diamond is significantly higher when compared to that of water. This is due to the fact that the
exchange value of diamond is more than the exchange value of water. However, the utility
derived from diamond is less than that of water. This diamond water paradox sparked debate
among the economist regarding the definition of the term ‘usefulness’. Furthermore, there was
also a confusion regarding the question that should the exchange value of a commodity be
judged from the supply side or the demand side (Cooter & Ulen, 2016). However, despite the
debates, both diamond and water has considerable utility for the people. However, in spite of
that, diamonds are more expensive than that of water.
Evaluation of the law of diminishing marginal utility
The consumption of each unit of a product gives a certain amount of satisfaction to the
consumers. This means that each unit of a product holds some utility for an individual. However,
the level of satisfaction derived from the consumption of each additional unit of product
diminishes with the increase in its consumption. This is known as the law of diminishing
marginal utility (Jevons, 2015). The advantage of the law of diminishing marginal utility is that it

3LAW OF DIMINISHING MARGINAL UTILITY
enables the consumers to understand at what level of consumption, they would derive the
maximum satisfaction. Any further consumption of an additional unit of the concerned product
would only lead to dissatisfaction. Any rational consumer would therefore stop consumption of
the product once the satisfaction level has been achieved. Thus, the law of dimishing marginal
utility aids a consumer to rationalize his or her choices and purchasing ability.
Identification of certain items which do not follow the law of diminishing marginal utility
The general law of consumption follows the law of diminishing marginal utility.
However, there are certain objects in the environment, the consumption of which do not lead to
any diminishing marginal utility (Stepan, 2018). For instance, the purchase of gold does not lead
to diminishing marginal utility. This is due to the fact that gold always has a value of exchange.
Furthermore, gold can be stored for any period of time without leading to any loss of the product.
Another object which does not follow the law of diminishing marginal utility is that of the desire
for knowledge. Knowledge is considered to be important during all phases of life. Any
knowledge gained at any point of time is not unwanted as it might help the individual later in his
or her life. Thus, these two mentioned objects do not follow the law of diminishing marginal
utility.
Law of diminishing marginal utility as applied to the water and diamond paradox.
The law of diminishing marginal utility states that the consumption of an additional unit
of product would lead to diminishing rate of utility. This occurs in the situation when the
individual is already satiated to the maximum level. The law of diminishing marginal utility
helps to explain the water and diamond paradox (Stepan, 2018). Water is the most important
product for an individual but when observed carefully, it is seen that individuals give more value

4LAW OF DIMINISHING MARGINAL UTILITY
to diamonds. This can be explained by the fact that an additional unit of water is considered to be
less important than an additional unit of diamond. However, this does not mean that diamonds
are considered to be more important than water. It is just that if given a choice to consume an
additional unit of water, individuals would instead choose to purchase an additional unit of
diamond.

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References:
Becker, G. (2015). Marginal Utility. Wiley Encyclopedia of Management, 1-1.
Cooter, R., & Ulen, T. (2016). Law and economics. Addison-Wesley.
Jevons, W. S. (2015). From Smith to Marx. THREE In ECONOMICS, 46.
Kauder, E. (2015). History of marginal utility theory (Vol. 2238). Princeton University Press.
Kushlev, K., Heintzelman, S. J., Oishi, S., & Diener, E. (2018). The declining marginal utility of
social time for subjective well-being. Journal of Research in Personality, 74, 124-140.
Rachlin, H., Arfer, K. B., Safin, V., & Yen, M. (2015). The amount effect and marginal
value. Journal of the experimental analysis of behavior, 104(1), 1-6.
Stepan, J. (2018). Money, Price, Value, And Exchange. Ethos. Kwartalnik Instytutu Jana Pawła
II KUL, 31(1), 221-241.
Tan, L., & Zhang, Y. (2015). Optimal resource allocation with principle of equality and
diminishing marginal utility in wireless networks. Wireless Personal
Communications, 84(1), 671-693.