Monday, October 15, 2012

Law of diminishing marginal utility

In Economics, there is one fundamental law called as Law of diminishing marginal utility.

Before we go further lets set the premises. Marginal means small change. According to Austrian school of economics, Utility could be defined as the satisfaction of needs. [Wiki says, the contemporary mainstream economic theory defers this metaphysical notions and even quantify utility]

To sum up the law of diminishing marginal utility, more you consume a commodity, the marginal utility of the commodity decreases.

To use the food analogy, when you are hungry and eat your first idly, it tastes good, even it is awful and you value that idly way too much. When you are at tenth idly, you are no more hungry. The eleventh idly adds no value or serves no purpose. May be some more calories! This is law of diminishing marginal utility.

There are many places which i feel the most that this law of diminishing marginal utility doesn't holds good.
First, Money. Of course, the first million is always the difficult and hard to get by. Rest is easy. The point is do you stop making millions. Wouldn't you think a billion or two is cool after making few millions.
Oh yeah my most favourite one, sleep. No matter how long you sleep, don't you value the last five minutes of your morning sleep to be more valuable than the long sound sleep? Here the last unit is much more valuable precious than the first unit or all the other previous units combined!

Well there are other places where this law of diminishing marginal utility does not holds good? But I will leave it to your wild imagination ;)
It was a reference to books and knowledge. More the books you read more the knowledge you get not otherwise right. what were you thinking about? ;)

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