Introduction
The law of diminishing marginal utility is one of the essential aspects of economic activity. It can be used to explain why satisfaction with specific foods may decrease as their consumption increases. This means that the more a person receives certain benefits, the more they become bored. Thus, for example, water as the most valuable resource does not bring the expected satisfaction because people do not experience its shortage. This paper aims to investigate the effect of diminishing marginal utility and its impact on the economy.
The Economic Impact of Diminishing Marginal Utility
Principle of Diminishing Utility in Commodities
The theory of diminishing utility works for all known commodities, including food and other goods. As an example of this principle, consider the portions of food presented in high-end restaurants. They are much less than those with which a person can get enough. This can be done so that a person’s effect after they try the food remains as positive as possible (Amacher & Pate, 2019). Thus, they can lure a person to come to the institution several more times, positively affecting financial performance.
However, there are some products that are not subject to the law in question. An example of these goods would be necessities such as car fuel or luxury items that many people continue to buy because of their status. Therefore, they cannot stop buying them, feeling pleasure not from the thing itself but from the consequences of its use.
Explaining the Diamond-Water Paradox
The law in question strongly impacts the market for goods and consumers. Thus, buyers are able and willing to pay more for products that are the first for them in a particular segment than for all subsequent ones (Mohammed, 2018). This explains why people are willing to pay substantially more for a diamond than a bottle of water.
The law of diminishing marginal utility can explain the diamond-water paradox because buying water does not bring joy because of its routine and everyday use. At the same time, diamonds are a luxury item that people can rarely afford, so the pleasure of buying them is higher. As a result, these materials are more valuable.
Consumer Behavior and Product Diversification
In addition to buying the same goods, the principle of diminishing utility is reflected in why people diversify their consumer behavior. A consumer’s pleasure from buying one product type decreases with each new purchase. Thus, switching and using a new product can restore satiety (Mohammed, 2018).
Because of this effect, the ultimate marketing goal of most companies is to advertise their product so that the consumer will want to repurchase it. This leads to a constant desire to change each subsequent product, such as releasing new iPhone models. It will lose customers if the company does not provide enough innovation in its next phone iteration.
Economic Impact of Diminishing Utility
The marginal utility can be harmful when the buyer reaches the point where the product is not enjoyable; they stop buying. Due to this, some companies may suffer huge losses. That is why the theory of diminishing utility is the main factor determining all companies’ strategic development and the economy’s global development. If satisfaction starts to fall, organizations will lose profits (Mohammed, 2018).
Accordingly, they have to develop innovations, and thus the concept under consideration is the main factor in the movement of progress. Without this effect, people would stop buying new goods and would always be interested in revolutionary products that use the same one.
Application in Marketing and Sales Forecasting
In economics, the usefulness of a product greatly simplifies the calculation for determining how relevant it will remain. Marketers and economists get reliable information about possible sales based on the novelty of the product idea and how many people it could potentially be of interest to (Amacher & Pate, 2019). This law can be used to explain why clients behave in specific ways. An example of this principle is the release of sequels to well-known and popular films, where each next part collects less money at the box office than the previous one.
Applying the law of diminishing utility can find its way into the pricing companies set up for their products. If the organization does not rely on losing customer satisfaction, its sales will fall. At the same time, when considering this system, two strategies can improve sales (Mjmfoodie, 2010). First, companies should lower prices when releasing the same products for a long time. An alternative way to retain customers would be to produce innovative products. Such strategies can ensure that companies meet consumer demand and optimize financial returns.
Political Strategies and Economic Policies
This law is relevant in the development of political strategies and campaigns. Politicians can consider how they should calculate tax policy for its maximum effectiveness. Excessive consumption of one type of goods can be heavily taxed. A similar principle works about earnings when large incomes oblige a person to pay more taxes. In addition, consideration of the law of diminishing utility can help in planning political campaigns to analyze which needs of the population are most urgent.
Conclusion
In conclusion, it is worth saying that the law of diminishing utility explains people’s consumption patterns and why old products are not successful. The more people buy the same product, the faster they will reach the point of no return when the interest starts to fall. Thus, given this phenomenon, many large manufacturers of various products can avoid falling sales by innovating and developing new concepts to attract attention. At the same time, the pleasure from the product cannot decrease even if it is necessary for people, like water.
References
Amacher, R., & Pate, J. (2019). Principles of microeconomics, 2nd ed. Bridgepoint Education.
Mjmfoodie. (2010). Episode 17: Diminishing Marginal Utility. [Video]. YouTube. Web.
Mohammed, F. (2018). Why Are Diamonds More Expensive Than Water? JstorDaily. Web.