Operation of Law of Diminishing Marginal Utility

Operation of Law of Diminishing Marginal Utility- Causes & Exception

Causes of Operation of Law

This law operates due to the following reasons:

1. A particular want is satisfied:

   Human wants are unlimited but a particular want can be satisfied on a particular point of time. Due to this reason as the consumer goes on consuming more of a commodity, its utility goes on diminishing Sooner or later he reaches the point of satisfaction, where his total utility is maximum and marginal utility is zero and after that it becomes negative.

2. Commodities are imperfect substitutes:

   There are substitute goods but they can be substituted to some extent only and there is no perfect substitutes of goods. For example, tea in place of coffee and coffee in place of tea cannot be used to an unlimited extent. The two can be substituted for one another only upto a certain limit. After that limit if the consumer makes use of tea for coffee or coffee for tea, then the marginal utility is derived thereof will go on diminishing.

3. Alternative uses:

   Some commodity having a variety of uses in our daily life. The use of a commodity depends on the basis of priority for a particular use. For example milk, as we move from more important use of a commodity to less use of it the marginal utility of that commodity will decline.

4. Nature of human behaviour :

   Law of diminishing marginal utility applicable due to the nature of human behaviour. A consumer will consume more of those goods which he has not consumed and less of those goods he has already consumed. On account of such nature of human behaviour is the cause of operating the law.

5. Intensity of want declines :

   Utility of a commodity also depends upon intensity of the want. As a consumer goes on consuming additional units of a commodity the intensity of this want goes down and consequently the subsequent utility goes on declining.

Exceptions to the Law of Diminishing Marginal Utility

The following are the important exceptions to the law:

1. A Rare Collections:

   There are certain groups of commodities, the marginal utility of which does not diminish with every increase in the stock of them. In the collection of curious and antiques, stamps, old paintings, coins etc., the law of diminishing marginal utility does not hold good. A person may demand despite the additional units of the curious articles or stamps with increasing intensity. But, according to Prof. Viner, this is no exception to the law, if we take a complete set as the proper unit of observation. For instance, if there are known to be two existent pearls of the same type these two should be taken as one unit. The addition of pearls of the same type to the units will yield diminishing utility. In other words, a person will not pay a higher price in acquiring the same type of stamps or coins. Therefore, it is not a real exception to the law of diminishing marginal utility.

2. A Drunkard :

   It is said that the law of diminishing marginal utility does not hold good in the consumption of liquor. The additional doses of liquor will yield increasing marginal utility to a drinker. But this argument is not correct because a drinker is not a rational consumer and we do not study his irrational behaviour in economics.

3. Prestigious Goods:

   It is said that the law fails when there is a large number of consumers to consume a commodity. The marginal utility of one set of telephones, for example, rises with increasing use of telephone. Similar is the case with fashion or style commodities. But the law still remains true with regard to these commodities; that at any given period of time, given the extent of the use of the commodity, the marginal utility of additional units diminishes. For instance, we may imagine a situation when all the families of a city possess telephone facilities; then it is certain that an additional set of telephone will yield lessened satisfaction to the same family.

4. A Miser:

   It is also said that the law does not apply to money. A person gets increasing marginal utilities from additional amounts of money. This is particularly true in the case of a miser. But in the long run, the law will apply to the miser also. Moreover the miser is not assumed to be a rational man and therefore, his activities are not studied in economics.

The above exceptions are not real and hence the law of diminishing marginal utility is the universal law applicable in all cases of consumption.

According to Taussing, “The tendency shows itself so widely and with so few exceptions that there is no serious inaccuracy in speaking of it as universal.” The law of diminishing marginal utility is of paramount importance, because it serves as the basis of the law of demand and provides adequate reason for the negative slope of the demand curve.

Important links

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