Utility is the power of a good to satisfy the wants.
The following hypothetical schedule shows the marginal utility and total utility of consuming apples.
The relationship between marginal utility and total utility is mentioned below:
a. Initial stages witnessed an increase in the total utility at a decreasing rate. The marginal utility falls but remains positive. The total utility increases from zero to 18 after consuming 3 apples. The marginal utility falls from 6 to 2.
b. After reaching a certain consumption level, the total utility will reach a maximum. After consuming 4 apples, the total utility reaches up to 18. Marginal utility at this point will become zero. This is called the saturation point or point of satiety.
c. The total utility begins to fall, and marginal utility becomes negative. At the consumption of 5th apple, the total utility falls from 18 to 10, and the marginal utility becomes negative to - 2.
The marginal rate of substitution is the rate at which the consumer is willing to sacrifice one good to obtain one more unit of the other good.
The following hypothetical can clearly explain the concept of diminishing marginal rate of substitution:
We assume that the consumer is indifferent between the above 4 combinations of A, B, C, D. By joining these points on the curve we will get an indifference curve.
The slope of the indifference curve can be estimated by the given formula:
MRS of XY = quantity of the good sacrificed/ quantity of the wood obtained
MRS of XY = Change in Y/ Change in X
So we can say that the marginal rate of substitution is the same as the slope of the indifference curve.
This rate keeps on decreasing due to the law of diminishing marginal utility. As a consumer consumes more of good X, the additional utility derived from each extra unit falls. He would be willing to sacrifice fewer units of Y to obtain 380more units of X. As observed in the table, initially he is willing to sacrifice 4 units of Y for 1 unit of X. This falls to sacrificing 2 units of Y for 1 unit of X.
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