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In the context of cardinal utility, liberal economists postulate a law of diminishing marginal utility. This law states that the first unit of consumption of a good or service yields more satisfaction or utility than the subsequent units, and there is a continuing reduction in satisfaction or utility for greater amounts.
The law of diminishing marginal utility implies that poorer people will gain more utility from money for additional spending than the wealthy. For instance, if a homeless family is given a gift certificate for a house, they will be able to use it to provide shelter for themselves.
Gossen's First Law is the "law" of diminishing marginal utility: that marginal utilities are diminishing across the ranges relevant to decision-making. Gossen's Second Law , which presumes that utility is at least weakly quantified, is that in equilibrium an agent will allocate expenditures so that the ratio of marginal utility to price ...
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The law of diminishing returns is a fundamental principle of both micro and macro economics and it plays a central role in production theory. [ 5 ] The concept of diminishing returns can be explained by considering other theories such as the concept of exponential growth . [ 6 ]
Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. It states that the reason why the price of diamonds is higher than that of water, for example, owes to the greater additional satisfaction of the diamonds over the water.
In economics, the marginal rate of substitution (MRS) is the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility. At equilibrium consumption levels (assuming no externalities), marginal rates of substitution are identical.
However, the law of diminishing marginal utility means an additional unit consumed brings a lower marginal utility than that carried by the previous unit consumed. For example, drinking one bottle of water makes a thirsty person satisfied; as the consumption of water increases, he may feel begin to feel bad which causes the marginal utility to ...