Economics uses the term utility to represent the complete satisfaction an individual obtains from the consumption of a commodity. Satisfaction influences the demand and price of a commodity in that an increase in utility leads to higher demand and price. This essay will describe the relationship between total utility and marginal utility and explain if the marginal utility can be negative. It further will examine the diamond-water paradox, evaluate the law of diminishing marginal utility and identify some items that do not follow the law of diminishing marginal utility.
Total utility and marginal utility are related because a change in one value of one affects the other. Total utility is the total amount of individual utilities obtained from the consumption of different commodities. In contrast, marginal utility is an addition to the total utility due to the consumption of an additional commodity (Todorova, 2020). For instance, when a person eats the first mango out of 3, its utility or level of satisfaction is likely to be higher than the others. If the first mango has a utility of 20, the second may have a utility of 15 and the third a utility of 10, indicating less satisfaction as consumption increases. The total utility for the first two mangoes is 20 plus 15, adding up to 35. After eating the third mango, the total utility becomes 45, where the additional utility value of 10 is a marginal utility which is an addition to the total utility. Marginal utility is the additional fulfillment obtained from consuming an additional commodity.
The increase in total utility continues until the satisfaction obtained from additional commodities becomes zero or negative. Marginal utility diminishes in any extra gain of a smaller added value of commodity consumed (Grafton et al., 2020). For instance, if the utilities of consuming 7 mangoes are 20,15,10, 5, 0, -5, and -10, the total utility will start decreasing when the consumer eats the sixth mango. The satiety point is indicated by a marginal utility value of zero, and as the marginal utility becomes negative, the total utility starts decreasing (Todorova, 2020). Negative marginal utility indicates that consuming an additional unit of a good or service causes dissatisfaction or harm.
The paradox of value indicates that diamond has a higher market value even though water is essential for survival. This can be explained by the marginal utility theory, which stipulates that the value of a commodity is based on subjective use. The price is not determined by its real usefulness or effort used in its production but by its marginal utility. The total usefulness of water or diamond does not determine its price; rather, the market value is influenced by the importance of each additional unit (Grafton et al., 2020). While the total utility of water is high due to its essentiality to survival, its high supply translates to low marginal utility. Each extra water unit can be subjected to a less urgent or valuable use as the more important uses are already satisfied. Conversely, each additional unit of diamond has a high value because of the low supply compared to water which is in abundant supply.
The law of diminishing marginal utility states that satisfaction of consuming a product fades as one consumes more units of the item. For instance, one may take a certain type of candy for some time but later decide to buy less or a different type of candy because the satisfaction initially obtained from candy has diminished. The marginal utility of a product reduces with its rise in availability (Trifu, 2020). The first interaction of a person with an economic good is always based on how they initially valued the good. The law explains how an increase in money stock lowers the exchange of money value units because each successive portion is utilized to buy the less valuable unit.
The law of diminishing marginal utility has limitations, including inapplicability to certain commodities and situations. Examples are rare collections, hobbies, habitual products such as cigarettes, as well as long-lasting and durable goods like buildings, vehicles, and refrigerators (Trifu, 2020). In singing, satisfaction increase with the production of more new songs; therefore, the level of utility increases with an additional item. For rare collections of old coins, the greater the number of collections gained, the higher the utility. For habits such as drinking alcohol, the satisfaction level increases with additional consumption. Buildings, vehicles, and refrigerators cannot be subjected to the law of diminishing marginal utility because their usage is not continuous, and they are durable or even valuable. The water-diamond paradox can be explained by the law of marginal utility because each additional unit of a diamond is of high value compared to water. This is because water is in high supply, and its additional units are used for less important activities (Grafton et al., 2020). The market of a commodity is determined by marginal utility rather than its overall usefulness or essentiality.
The law of diminishing marginal utility applies to our environment sometimes without our knowledge because the resources that we utilize are either not enough, or they satisfy and make us happy. Therefore, when the marginal utility is at zero, the total utility always drops. Most people valued diamonds more because it is precious than water which is of high value. Some items do not obey the law of diminishing marginal utility like hobbies, talents, habits, and long-lasting, durable goods like buildings. The law of diminishing marginal utility explains the diamond-water paradox because the marginal utility of water decreases with continued availability due to high supply. On the contrary, diamond supply is low; hence any additional unit is considered highly valuable.
References
Grafton, R. Q., Chu, L., & Wyrwoll, P. (2020). The paradox of water pricing: dichotomies, dilemmas, and decisions. Oxford Review of Economic Policy, 36(1), 86-107. Web.
Todorova, T. (2020). Diminishing marginal utility and the teaching of economics: A note.
Trifu, A. (2020). The marginal diminishing returns/marginal increasing returns in the pursuit of happiness. Global Journal of Management and Business Research. Web.