Summary
Utility analysis is a cornerstone of consumer behavior theory. It defines 'utility' as the want-satisfying power of a commodity. The core concept is the Law of Diminishing Marginal Utility (DMU), which states that the additional satisfaction (marginal utility) a consumer gets from consuming successive units of a commodity goes on diminishing. This law, proposed by Alfred Marshall, is based on assumptions of rationality, cardinal measurement of utility, and continuous consumption. It has significant practical applications in explaining the paradox of value, forming the basis for the law of demand, and guiding fiscal policy.
Must Know Points
- Utility is the want-satisfying power of a commodity.
- Total Utility (TU) is the aggregate utility from all units consumed.
- Marginal Utility (MU) is the additional utility from consuming one more unit.
- The Law of Diminishing Marginal Utility (DMU) states that MU decreases with each additional unit consumed.
- When TU is maximum, MU is zero. This is the point of satiety.
- When TU falls, MU becomes negative.
- The Law of DMU is the basis for the Law of Demand.
- The paradox of value (water-diamond paradox) is explained by MU, not TU.