What is Marginal Utility?
Utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility of a good or service is the change in the utility from an increase in the consumption of that good or service. Lets understand the law of marginal utilities by doing the following experiment.
Divide the class in two groups – Group A and Group B
Give 4 glasses each filled with 100 ml of water to Group A and ask them to choose a volunteer to play the activity.
Give 4 glasses to Group B each filled with 100 ml including 1 glass of water, 1 glass of mixed fruit Juice, 1 glass of coke and 1 glass of lemonade
Ask the volunteer from Group A to drink the glass of water and similarly ask volunteer from group B to drink the glass of water that they got.
Again ask the volunteer from Group A to drink another glass of water from their stock and ask the volunteer of group B to choose and drink the glass as per his choice of drink from the stock. Repeat this until all 4 glasses are finished by the volunteers of group A and group B respectively.
Call the volunteers and ask them the following questions:
- Did volunteer A enjoy all four glasses of water or did he enjoy the first glass of water the most and then the enjoyment lessened with each repetitive glass ?
- Did volunteer B all four glasses of different choices of drinks equally?
In the above activity, Group A presents the law of Diminishing Marginal Utility and Group B presents Law of Equi – Marginal Utility.
Law of diminishing marginal utility, therefore, states that the first unit of consumption of a good or service yields more utility than the second and subsequent units, with a continuing reduction for greater amounts. Therefore, the fall in marginal utility as consumption increases is known as diminishing marginal utility. The volunteer of Group A experienced less interest and satisfaction on drinking the same glass of water repeatedly. He experienced the diminishing marginal utility. Mathematically, the law of diminishing marginal utility can be represented as :
On, the other hand, Law of equi – marginal utility states that if the consumer keeps on changing the product on each subsequent consumption, he or she will experience equal satisfaction on each consumption. The volunteer of Group B experienced the law of equi – marginal utility as he had the excitement of choosing and replacing the earlier consumed product everytime and he had the same satisfaction on each consumption. Mathematically, the law of equi marginal utility can be represented as :
MU1 = MU2 = MU3……= MUn