Understanding the Law of Diminishing Marginal Utility and Smart Financial Planning with Galgal

Picture Rohit, a 25-year-old software engineer who recently received a bonus from his company. Excited to finally start collecting his favourite sneakers that he has been dreaming of since college, he felt a decline in excitement with each additional pair of sneakers he bought within a short span. This scenario is a classic illustration of the Law of Diminishing Marginal Utility, a concept foundational in economics and everyday life. This principle is particularly relevant for young Indians in university or early stages of their careers, who may indulge in impulse spending. Here, tools like Galgal play a vital role in aligning financial planning with personal satisfaction.

 

The Concept and its Evolution

The Law of Diminishing Marginal Utility, which posits that the satisfaction from each additional unit of consumption decreases as one consumes more, was initially put forth by German economist Hermann Heinrich Gossen and further refined by British economist Alfred Marshall. This law is pivotal in understanding consumer behavior and decision-making.

 

Relatable Examples

  1. Morning Coffee: The first cup of coffee in the morning may feel invigorating, offering substantial satisfaction. However, as one consumes more cups, the pleasure derived from each additional cup decreases noticeably.
  2. Online Shopping: Imagine adding items to an online shopping cart. The first few items picked out may bring immense joy. But as more items are added, the initial excitement wanes, often leading to the realization that the later additions feel unnecessary.
  3. Enjoying a Meal: Consider the experience of eating a favorite dish, like pizza or pasta. The first few bites are often the most enjoyable, warranting a willingness to pay a premium. However, halfway through the meal, that excitement diminishes, and the idea of paying the same amount for another round seems less appealing.Each of these scenarios reflects the Law of Diminishing Marginal Utility, demonstrating how initial satisfaction can decrease with each additional unit of consumption, whether it’s coffee, shopping items, or food.

 

How does the Galgal app help align spending with Utility? 

Galgal app’s features of ‘Auto-budgeting’ and ‘Custom goals’ encourage young Indians to make more informed, satisfying, and economically sound decisions about their spending and savings, aligning their financial habits with their long-term happiness and goals. financial tools like Galgal are crucial in applying this economic principle to real-life financial planning, especially for young Indians navigating their spending and saving habits.

  1. Auto-Budgeting and Mindful Spending:
    • Understanding Consumption Patterns: Galgal’s auto-budgeting feature helps in recognizing and adapting to one’s diminishing utility from repetitive or excessive consumption. By categorizing expenses into ‘essentials’, ‘savings’, and ‘guilt-free’ spending, it provides a clear overview of where the money is going.
    • Aligning Spending with Satisfaction: This categorization encourages users to reflect on their spending in each category. For instance, a user might notice that spending on ‘guilt-free’ items, like extra cups of coffee or additional online purchases, brings less satisfaction over time. By tracking these expenses, Galgal aids in identifying the point at which the utility of additional spending begins to diminish.
    • Adapting Budgets for Maximum Utility: Armed with this insight, users can then adjust their budgets, reallocating funds from areas of diminishing utility to those that bring more consistent satisfaction or investing more in ‘savings’ for future goals.
  2. Custom Goals for Purposeful Savings:
    • Testing True Desires Versus Impulses: The Law of Diminishing Marginal Utility also applies to our desires and the satisfaction we get from fulfilling them. With Galgal’s custom goals feature, users can set aside funds for specific aspirations, be it a new tech gadget, a trip, or further education.
    • Delayed Gratification and Increased Satisfaction: By saving over time for these goals, users can assess whether their desire for the item or experience remains consistent. If the desire persists, it indicates a more meaningful and considered choice, rather than an impulsive buy driven by fleeting satisfaction.
    • Rationalizing Spending Decisions: This approach also allows for a practical application of the Law of Diminishing Marginal Utility. As users save towards a goal, they can continuously evaluate their excitement about the goal, helping to ensure that their spending brings lasting satisfaction, not just a temporary thrill.

Isn’t this a smarter way to navigate our financial journeys, ensuring every rupee spent brings us closer to lasting contentment?

 

Conclusion

For young Indians navigating their financial and consumer choices, grasping the Law of Diminishing Marginal Utility is essential. It fosters a culture of mindful spending and saving. With tools like Galgal offering structured financial guidance, isn’t it time to reevaluate our spending to ensure it brings true, lasting contentment?

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