Limit utility is an acquisition that a person receives when using an additional unit of good. With pure competition through this indicator, you can determine the market price of the goods.
Brief information
It can be said that the law of marginal utility describes an increase in the total benefit in conditions of consumption of an additional unit of good. This principle was almost simultaneously described by three major economists: Leon Walras, Karl Menger and Stanley Jevons. The latter outlined his own ideas on this issue in a lecture that was published in 1866. Karl Menger spoke about this question in 1871 in the Foundations of Political Economy. Leon Valras turned to this question in 1874, while all three worked independently on this issue. It should be noted that marginal utility is the term that Friedrich von Wieser introduced into economic science. Let us consider the basic principle of this phenomenon. In accordance with it, the value of a certain kind of good is determined in accordance with the utility of the marginal instance, which satisfies the least urgent need.
History
"Ultimate Utilities" is a concept that modern economists first turned to when they worked on the theory of value. Consider what scientists are now putting into this term. They understand it as the least significant type of benefit, brought by a certain good in the field of meeting the needs of an individual. Suppose, for example, that bread can serve for distilling, foraging, sowing and eating. The first of the roles can be considered the least important. The ability of bread to satisfy this need can be considered its marginal utility. Separately, we should pay attention to another important feature of this phenomenon. Even in relation to one need, the good is capable of possessing various marginal utility. As an example, one can consider the importance of bread for a hungry and well-fed person. The indicator that interests us decreases with an excess of the good and increases with its shortage.
A fall
Now we will discuss in more detail the law of diminishing marginal utility. It says that due to the increase in the consumption of goods, the overall utility increases, but the speed of such a process slows down. Now let us look at the law of diminishing marginal utility from the mathematical point of view. We find out that the first derivative in the function of general utility is positive and depends on the consumption of the good. However, it decreases. The second derivative is negative. The decreasing marginal utility looks like an increasing function, which is turned upwards by a convexity. The indicator of interest to us increases with consumption. In the conditions of maximum general utility, it turns to zero. After this, the marginal utility becomes negative. The total, in turn, reaches a maximum value and begins to decrease. For example, if we talk about a hungry person, for him the marginal utility of the very first soup bowl is much higher compared to the second one. This is true for other types of goods.
Limited applicability of the law
You can only compare products that include homogeneous units that are consumed by one person. For example, bananas and apples can not be considered. Even minor differences can affect the final result. For example, you can not consider together red and green apples. All units of the selected product must have the same quality and weight. For example, apples can be sour and sweet. The second product is able to provide greater satisfaction to the consumer. A buyer with unchanged tastes is considered. Do not assume changes in the income, preferences, customs and habits of the consumer. Changing one of these factors can affect the usefulness of the product, and the described law will not be applicable. Also, the continuity of consumption is necessary for the operation of the formula. If this condition is not taken into account, marginal utility may not go down. When there is a pause after consumption of the first unit of the product, there is a possibility that the demand for it will resume. Thus, from the next unit of good there will be a similar satisfaction.
Interesting Facts
Marginal utilities are indicators that prove that lowering prices encourages the consumer to increase the number of purchases of a certain product. However, the law described does not always work. In particular, it may not work in the case of a small quantity of goods. This case can be illustrated by a medical example. For example, if a person drinks one pill, he does not completely heal. If there are two of them, healing is possible to the fullest. But further use of tablets can only harm the body. As a result, marginal utility will turn into a negative utility.