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Tuesday, 7 August 2018

does law of diminishing marginal utility apply to money?

Dear Readers

In this article u will know about

1. What is marginal utility?
2. What is Marginal utility of money?
3. Does Law of Diminishing Marginal utility apply to MONEY?
4. Why is marginal utility of money considered constant?

Does law of diminishing marginal utility apply to money?
Law of diminishing marginal utility




Law of diminishing marginal utility states that as a consumer consumes a commodity continuously,his desire for such commodity tends to decrease for every unit. Hence, Marginal utility decreases with every unit for a consumer. e.g. A person is consuming toasts of standard size with no time gap then his desire for every extra toast will start to decrease. If he is getting 10 utility from 1st toast then he will get say 8 utility from the consumption of successive unit and so on.

Now we are taking a question that this law apply to money or not. Definitely not because as per human behaviour observation more money increase more desires. In other words if a person gets some money, his thirst for money does not quench. In this state we can say that Law of diminishing marginal utility does not operate on money. Now look from another side, you may have observed that rich person spends money carelessly than a poor or middle man. For a rich person utility of money is less and for the same amount utility of such money is more for a poor person. From this side and for conclusion it is said that marginal utility of money decrease for a rich person as he spends carelessly. If a person obtains any thing more than his expected desire , he does not care about it.

In Micro Economics, while studying Consumer equlibrium, Marginal Utility of money is considered constant. Practically as a consumer spends money, quantum of money decreases with him so marginal utility for money must increase. While studying Consumer equlibrium using utility analysis marginal utility of money is constant because it is considered measuring rod and unit of measurement should be constant. 

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