Law of Diminishing Marginal Utility
A human and religious view into Economics in order to pursue finer things in life instead of running after materialistic wants and desires If you like ice cream, and you eat one scoop, the first scoop will provide the greatest satisfaction.
If you eat another scoop, you’ll probably enjoy that also, but the satisfaction will be less than for the first.
At some point, you will not want any more ice cream. It happens with all goods, commodities or products – edible or non edible, perishable or nonperishable – which we consume.
That’s because the marginal utility will drop to zero and will even become negative. This is an everyday illustration of the law of diminishing marginal utility.
Marginal utility declines for everything, including money. Although many people want to amass great wealth, each dollar or rupees that is accumulated becomes worth less and less, because the marginal utility of what it can buy declines.
Diminishing marginal utility of income and wealth suggests that as income increases, individuals gain a correspondingly smaller increase in satisfaction and happiness.
In layman’s terms – “more money may not make you happy”.
Put simply, this proposition states that the effect on subjective well-being of a Rs.1,000 increase in income becomes progressively smaller the higher the initial level of income, for example, a Rs.1,000 will give more utility to a person who is earning Rs.10,000 than to a person earning Rs. 100,000. Distinguished scholars in economics, political science, psychology, and sociology who have made major contributions to the study of subjective well-being concur on this assertion.
Its policy appeal is great because it implies that raising the income of poor people or poor countries will raise their well-being considerably, while an increase of equal amount for the rich will have comparatively little effect.
Recent studies in behavioral finance also illustrate the point that the wealthiest nations are not the happiest one.
When we have little money, we tell ourselves that “more money” will bring us “more happiness.”
To a certain degree, this is true, if your life depends on it: Humans, at a minimum, require food, shelter and clothing to meet their basic physiological needs, and money is the primary means to acquire these basic needs. The point at which these needs are met, however, is where our utility for money begins to diminish — yet we move beyond our physiological needs and convince ourselves that greater monetary wealth will meet our ever-increasing needs for “happiness” as well which is not the case.
Now to understand the concept of diminishing marginal utility, first, you have to know what utility is.
Utility is an economic term introduced by Daniel Bernoulli (a Swiss mathematician) referring to the total satisfaction received from consuming a good or service.
Classical economists operate under the assumption that all utilities can be measured as a hard number. To help with this quantitative measurement of satisfaction, the designation of a “util” was created to represent the amount of psychological satisfaction a specific good or service generates, for a subset of people in various situations.
If, for example, an individual judges that a plate of biryani will yield 10 utils and that a piece of pizza will yield 12 utils, that individual will know that eating the pizza will be more satisfying. For the producers of biryani and pizza, knowing that the average piece of pizza will yield 2 additional utils will help them price pizza slightly higher than biryani.
Other things, you have to know about are Total Utility and Marginal Utility.
Total utility is the total satisfaction received from consuming a given total quantity of a good or service, while marginal utility is the satisfaction gained from consuming an additional quantity of a particular good or service.
Suppose our hypothetical consumer purchases five apples. The total utility of the five apples is 70. But marginal utility is 6. Total utility is total utilities of all 5 unit consumed. On the contrary, marginal utility is the addition made to total utility by the last unit – by eating the fiftth apple after fourth one gives marginal utility of 6- which one consider just worthwhile.
One quality of marginal utility is that it always declines for each successive quantity consumed of a particular good.
The law of diminishing utility refers to experience of every consumer. When a person starts consuming a commodity, his wants is very urgent and the consumption gives him very great satisfaction.
But as consumption proceeds, the satisfaction goes on progressively diminishing.
This is so because the first unit gives him greater pleasure since it means an urgent need. But by the time second unit is taken the edge of the wants has been blunted.
If a person is thirsty, he or she will find satisfaction in drinking water. However, after a certain point, the person is hydrated, and it can be harmful to drink too much water past that point.
In the words of Sir Sydney Chapman (an English Economist and Civil Servant):
“The more we have a thing the less we want additional increments of it or the more we want not to have additional increments of it.”
According to Alfred Marshall, one of the most influential Economist of his time:
“The additional benefit which a person derives from an increase of his stock of a thing diminishes with every increase of stock that he already has.”
You will notice that initially it is the marginal utility which decreases and not the total utility. The total increases at diminishing rate till a certain point, the point at which marginal utility become zero but when marginal utility turns into negative total utility also starts to decrease.
Diminishing marginal utility is probably the most important concept in all of economics because everything depends on it.
It is the source of our desire for variety.
We as human are never happy with one thing, we want more and more of different things.
But the materialistic things, we acquire will not able to satisfy us completely as a human being.
But all the finer things in life often defy the law of decreasing marginal utility. For example: art, science, philosophy etc.
Things like these aid us in our personal fulfillment and/or increase our self-esteem. Take a look at the Pyramid/Hierarchy of Needs’ created by psychologist Abraham Maslow.
Basic human needs like food, water, sex at the bottom of pyramid have decreasing marginal utility.
As we go up in the pyramid need for love/belonging has constant utility and therefore we never get tired of love for our family and friends and need for belonging somewhere and being loved by someone.
However, the last stage of the Maslow’s pyramid, the quest for self-actualization is never-ending. It’s what keeps most people motivated. The desire for knowledge and understanding the things around us and our own existence has increasing marginal utility. It is the knowledge itself that satisfy human as a whole.
It is a general perception that more is always better than less. The world takes this principle one step further and claims that the more wealth and possessions we store up the more satisfaction we have.
The well-known and commonly accepted theory in economics of “the law of diminishing marginal utility” tells us that the things we receive beyond what we need slowly become less satisfactory to us.
That first bite of food when we are hungry will be the one that is the most enjoyed, but if you were to continue to take more bite, every subsequent one would be less enjoyable until soon it would make you sick.
From multiple accounts in the Quran, we see that when God blesses, he blesses abundantly. However, God doesn’t bless so that we can endlessly store up for ourselves. We are blessed so that we can be a blessing for others.
When our priority becomes to store up more and more for ourselves, we slowly lose the satisfaction that we get from all those material things acquired.
Giving and sharing with other reverses that cycle and helps us to walk in greater gratitude and stewardship of the blessing God has given us.
However, by poorly utilizing these blessings given to us by God in this world, we can find ourselves in a place where there is diminished joy in our increasing wealth and possessions.
Our outlook and priority should be helping others with the blessings we possess whether tangible or intangible in form of money, wealth, knowledge etc.
There will never be a point where we will become “rich enough” to justify giving as a priority.
No matter what stage of life we are in or what income level we may belong to, we have the potential to be a help to someone or share or give to others whatever we possess.
A good indication of whether giving is a priority to us is when we are actively looking for opportunities to be generous rather than opportunities to receive.
Islam also encourages us to give sadqa (charity).
Being a good steward of what God has given calls for our focus to be outward rather than on ourselves.
As we run after God and strive to give others, not only do we find ourselves in a place where we have more than enough, but we also find we are more satisfied with the life we lead and the things we have.
What is life worth living?
This is a question that boggled human mind since antiquity. Interestingly, despite the different backgrounds each of us comes from—culturally, socially, religiously, and in every other respect—all of us realize that a life that makes a positive impact on others is a life worth living. There is something inside us that knows we ought to be a blessing and giver in any capacity that we can be, whether directly or indirectly.
If the law of diminishing marginal utility holds true, and I believe that it does, we actually increase our satisfaction by benefiting the lives of other people rather than storing up personal possessions with which our satisfaction only decreases.