Law of Diminishing Marginal Utility: Definition
Product consumption is part and parcel of a daily routine. While some products are viewed as more important, useful, or efficient than others, they are purchased regularly to be utilized for specific purposes. Their utility is also different; furthermore, the subject matter may alter based on a range of factors. The marginal utility of a certain product or a service is typically defined as the degree of satisfaction that the usage of certain services or foods produces (Kauder 11). The Law of Diminishing Marginal Utility (LDMU), in turn, states that, with a rise in the amounts of a specific product consumed by a customer, the rest of the products being used at the usual rate, the marginal utility of the overused product will drop (Bumas 25). Although there are reasons to assume that the value of a certain product or service will decrease once a buyer is overly exposed to it, there are reasons to assume that the levels of satisfaction are defined by individual aspects of the buyer’s personality and, therefore, do not necessarily hinge on the levels of consumption entirely.
Investigation Results: Description and Interpretation
The LDMU is viewed as a natural phenomenon mainly because of the propensity toward saturation that people typically have when it comes to product and service consumption (Kauder 14). The principles of LDMU are widely used to explore the changes in customers’ attitudes toward specific products and services. For instance, when considering the possible arguments in favor of LDMU, one typically refers to the Diamond- Water Paradox (DWP) as the primary tool for refuting the specified statement. According to the DWP, when comparing diamonds to water as purchase items, one may infer based on the LDMU principle that the value of water as a finite resource that is required to sustain life should be valued much higher than diamonds.
Furthermore, with the increase in the amount of water, its utility grows lesser with every new drop; for instance, the first glass of water will be used to quench one’s thirst, whereas the second and the third ones will be utilized to water the flowers and wash the dishes. However, the latter has a much higher price. The specified phenomenon was, in turn, explained by Adam Smith by the fact that the overconsumption of water leads to a certain discomfort, whereas the possession of an increasingly large number of diamonds will not. Herein the reasons for the paradox to exist lie. In other words, even the paradox described above, which, at first glance, subverts the idea of the LDMU, only reinforces its effects as a theory providing the explanation for the changes in demand for a certain product or service within a target market (Bumas 51-55).
It should be noted, though, that the specified law has its limitations. Therefore, from a certain perspective, the concept of LDMU is viewed as questionable. The fact that the phenomenon of utility is rather difficult to measure should be interpreted as one of the primary arguments against the LDMU. Indeed, according to Kauder, the relativity of utility can be considered one of the primary limitations of the LDMU principle (28). Particularly, the desire to possess a certain product or use a particular service hinges not only on one’s saturation with a product but also on a range of external factors, from marketing tools used to promote it to the environment in which buyers live.
The fact that there are no universal measurement tools for assessing the level of a product or service utility also needs to be included in the list of arguments against the use of the LDMU principle. Indeed, as stressed above, the concept of utility can be stretched extensively, thus, allowing one to view it from multiple perspectives. Therefore, the measurement of the subject matter can be carried out based on different indicators and, thus, with different results. The lack of certainty about the issue can be viewed as one of the key obstacles toward testing the LDMU principle and, thus, applying it to solve real-life cases (Kauder 29).
Finally, the fact that there is a resource the marginal utility of which remains consistent and unchanging deserves to be mentioned as one of the crucial limitations of the law. Specifically, the marginal utility of money remains roughly the same no matter what amounts thereof are provided. Therefore, the LDMU does not work when applied to money, which implies that the LDMU framework is flawed. However, it should be borne in mind that money is viewed as a product in the specified argument, though they should rather be referred to as a resource. Nonetheless, the specified arguments make the LDMU less credible (Bumas 53).
It would be wrong to claim that LDMU is inefficient. Quite on the contrary, it allows explaining a range of economic phenomena associated with changes in demand. However, it has certain limitations, which must be borne in mind to make successful financial decisions in the environment of a business organization.
Works Cited
Bumas, Lester O. Intermediate Microeconomics: Neoclassical and Factually-Oriented Models. Routledge, 2015.
Kauder, Emil. History of Marginal Utility Theory. Princeton University Press, 2015.