Diminishing marginal utility is a law of economics stating that as a person increases consumption of a product, while keeping consumption of other products constant. Diminishing Marginal Utility is the fact that each addition good or service consumed, creates a smaller and smaller amount of additional utility. There is a decline in the marginal utility that person derives from consuming each additional unit of that product (Investopedia, 2013).
three economic aspects in which the irrefutably true law of diminishing marginal utility plays an important role
(1) A rise in the money stock. A rise in the money stock must, for logical reasons, reduce the exchange value of a money unit. This is because the additional money unit can be used to satisfy an additional end that is ...view middle of the document...
(2) A lowering of the market interest rate. The pure market interest rate reflects societal time preference — which, in turn, is also implied in the axiom of human action. Time preference means that market agents value goods available today (present goods) more highly than goods available in the future (future goods).
If government intervenes in the time market — by, for instance, increasing the supply of bank circulation credit and fiat money — it necessarily causes a deviation of the market interest rate from the pure interest rate (namely pushing the market interest rate below the pure market interest rate), which subsequently must lead to malinvestment and boom-and-bust.
(3) Violating individuals' property rights. Violations of individual property rights (for instance through government taxation, regulations, etc.) will make property owners valuepresent goods increasingly more highly than future goods — a conclusion which follows from the law of diminishing marginal utility.
The rate at which an individual must give up "good A" in order to obtain one more unit of "good B", while keeping their overall utility (satisfaction) constant. The marginal rate of substitution is calculated between two goods placed on an indifference curve, which displays a frontier of equal utility for each combination of "good A" and "good B".
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