The law of diminishing marginal utility helps economists determine which changes will benefit consumers the most. In some cases, the government may choose to give more money to the poor. This will increase their value of each dollar. However, if someone has $5,000, the extra dollar will have no effect. As a result, the consumer will prefer the other goods with higher marginal utility. A simple example of the law is in agriculture. Agricultural produce needs a certain amount of fertiliser to produce higher yields.
The law of diminishing marginal utility explains that as supply increases, the marginal utility diminishes. As a result, the total amount of satisfaction from consumption falls. This is most clearly demonstrated by the fact that a child with a lot of toys will find a new one less exciting. In other words, as a person increases his or her utility from a new purchase, he or she is deprived of the same satisfaction.
As a result, the quantity of a good falls off as the consumer consumes it. Thus, the price per unit of consumption will fall, but the amount of additional satisfaction will increase. In some cases, this decrease is even higher if the quantity of the good is too large. The cost of an extra toy depends on the individual, but the cost is usually much higher when the price is high.
This law of diminishing marginal utility is useful to understand many microeconomic scenarios. In one example, a child becomes extremely hungry and loads his plate with food. The amount of satisfaction he gets from a plate of food is directly proportional to his level of hunger. Hence, the first plate will satisfy more than a second or third. The same is true of another example in which a child buys a new toy.
Different goods have different levels of satisfaction. Consequently, as a consumer, you will be less satisfied with one of them than you were when you bought them. In this example, the amount of satisfaction you gain from a new toy will be smaller than the value of the original one. This scenario demonstrates the law of diminishing marginal utility. While the prices of a single good or service will vary, the quantity of each good will decrease.
The law of diminishing marginal utility shows that a product’s utility is reduced as a consumer consumes more of it. The price of a single good decreases the utility of a given good. As a result, the amount of a certain product is a greater number of consumers who desire that particular product. In another case, the quantity of the same item is lower and a higher price will increase the value of the product.