Diminishing Marginal Utility is whereby the marginal utility that a person derives from a product declines steadily as he increases consumption level by consuming additional unit of the same product, while keeping consumption of other related products constant. For instance, when one takes that first bite of a cake, it seems like he just cannot get enough of the same. However, as he takes his second piece as well as his third piece, he may begin to realize that he has had enough the cake. Applying the same concept, for each additional piece of cake he consumes, the additional satisfaction he receives from consuming the cake decreases (Yaari, 2004).
Examples of where the law of diminishing marginal utility can be applied are many. For instance, Buffets are a perfect example where this law can be applicable. These kinds of restaurants solely depend on the law of diminishing marginal utility. For example, for a flat one price, a customer can eat all the food he desires (Yaari, 2004). The main reason that these buffets work very economically is that individuals reach a point where the utility gained from consuming an additional plate of the food is not worth the actual cost of consuming that additional plate.
The concept of diminishing marginal utility can also be applied in other everyday activities. For instance, imagine it is quite a very hot summer day and everyone is hungry, so they get some ice creams to quench their hunger. The first bite of the cake as well as the second one is great. But with every extra spoonful they consume, their hunger gradually decreases and they become cooler. So, even though the last bite may still be good, it is most likely not as fulfilling or satisfying as the first bite of the ice cream (Yaari, 2004).
There are many techniques that restaurants can impose in order to ensure than they obtain profits in spite of the diminishing marginal utility taking its play (Yaari, 2004). For once, restaurants can restrict anyone from getting with food out of the eating cafeteria. This is because individuals may just decide to take food home even in doggy bags. The restaurants can also restrict sharing of food among customers, as these will not maximize their profits.
Explicit costs are types of costs which occur and are immediately reflected in the documents of the business. These are types of costs which happen for a given purpose. Additionally, explicit costs normally have a direct effect on the company and its profits. These explicit costs always result in only tangible assets or even opportunities for the company. Explicit costs normally involve physical objects as well as money-based transactions (Castaneda, 2000). They include payments for rent, wages and salary, services received from other companies, maintenance, raw materials, and bills.
Implicit costs are costs not actually re[ported or shown as costs. They are usually costs described as opportunity costs or a lost opportunity in a given way, time or situation. These costs only deal with intangibles which normally leave without a record or even trace. They include wasted potential opportunities, profits, time, and labor. They waive the potential satisfaction and benefits in certain business transactions (Nackman, 2011).
Payment for labor purchased in the labor market is an explicit cost since it is captured in the books of records as an expense. A firm which uses its own warehouse is exhibiting an implicit cost since none of such charges will be reflected in its books of accounts. Rent that is paid for a place in the warehouse not owned by the firm is an explicit cost since it must be recorded in the firm’s accounts. The wages that owners could earn if they did not work for themselves is an example of an implicit cost, since it’s a wasted potential opportunity to such an owner.
Patricia Abernathy, you are quite right by giving a buffet-style restaurant as an example of a firm that applies a diminishing marginal utility law. The restaurants solely rely on this principle, whereby a customer pays a flat rate of a given amount and is allowed to consume any amount of food. The restaurants assume the obvious facts that the customer will probably spend few minutes eating and he becomes satisfies such that the cost of taking another plate of food is not worth the benefit. However, there are cases where the customer can just decide to stay longer enough and consume more than the average food expected. In this case, the Buffet may realize a loss as the principle of diminishing marginal utility may not be applicable. Therefore, it is advisable that these firms institute certain regularities such as setting the maximum amount of food that can be consumed, after which, an individual will be requested to pay again or even allow a given time duration of a customer staying in the Buffet after purchasing his food.
Nassim hajouji, sleeping can be a perfect example of where diminishing marginal utility principle can be applied. If the average hours of sleeping are 6 hours in a day, then the first few hours of sleep will be much enjoyable than the last few hours as the utility is high. However, after the average hours of sleep have been consumed, the extra hours spent sleeping is of no importance at all to the person. This is because all the useful hours of sleep have been consumed and the extra hours spent on the bed may be as harmful as making the person become unwell. Similarly, eating a cake can display a very good example of diminishing marginal utility. The fact that you love cakes will not allow you to eat all the available cakes without your utility diminishing. Of course, the very first cake will be very much enjoyable and you will derive maximum utility from its consumption. However, consuming the second, third and fourth cake makes you feel satisfied, such that eating any extra cake will not be possible. This is because the diminishing marginal utility could have taken place, thus reducing your desires for the cakes.
References
Yaari, M. E. (2004). Risk aversion without diminishing marginal utility. London.
Rabin, M., University of California, Berkeley., & University of California, Berkeley. (2000). Diminishing marginal utility of wealth cannot explain risk aversion. Berkeley: Institute of Business and Economic Research.
Nackman, M. J. (2011). Implicit vs. explicit requirements and independent research and development costs under ATK Thiokol: Securing the future of United States technology investment.
Castaneda, M. A. (2000). Transaction costs, the theory of the firm, and the organization of production.
