Law of Diminishing Marginal Utility

Law of Diminishing Marginal Utility

Meaning of Law of Diminishing Marginal Utility

This law is an important and fundamental law of economic which was first scientifically explained by Gossen. Later on it was developed by Marshall. The law of diminishing marginal utility states that, other things being equal, the marginal utility of a good diminishes as more of it is consumed in a given time period. The law of diminishing marginal utility is derived from the ‘satiable characteristic of a particular want, so it is also known as the law of satiable wants’. The law is based on common experience of each and everyone of us, in our role as consumers of goods and services. As a consumer goes on consuming more units of a particular commodity, the additional utility that a consumer drives from consumption of that commodity goes on diminishing progressively.

Definitions:

According to Marshall, “The additional benefit which a person derives from a given stock of a thing diminishes with every increase in the stock that he already has.”

According to Samuelson, “The law of diminishing marginal utility states that ceteris paribus as the amount of a good consumed increases, the marginal utility of that good diminishes.”

Assumptions of the Law :

Following are the assumptions of the law of diminishing marginal utility:

1. Consumer is a rational person. It means that he wants to maximize his satisfaction.
2. The taste, fashion, customs and habits of the consumer remain unchanged during the period of consumption.
3. It is also assumed that the commodity is consumed within a suitable time period. There is a continuity in consumption without any time gap.
4. Commodity is consumed in some standard units, such as a cup of tea, a glass of water and so on.
5. There is no change in the price of the commodity and its substitutes.
6. The income of the consumer does not change, during the period of consumption.
7. Utility can be measured in the cardinal number system.
8. Every unit of the commodity being used is of same quality and size.
9. Utility of one commodity is independent of the other.
10. Marginal utility of money remains constant.
11. No change in the mental state of consumer.

Explanation of the Law :

On the basis of the aforesaid assumptions, this law can be explained with the help of a schedule and the diagram given below:

Table: Diminishing Marginal Utility

It is evident from the above table that as more and more units of Apples are consumed marginal utility from each successive unit goes on diminishing.

In other words, as the consumer increases the quantity of apples, its marginal utility diminishes. This means that marginal utility is negatively sloped. Above table indicates that marginal utility can be zero and even negative. Fifth unit of apple yields zero marginal utility, it means at this stage, consumer’s want may be fully satisfied. If he is forced to take the sixth unit of apple it may upset his system. In other words, he gets negative utility,- 2 unit

In the diagram number of apples are shown on OX axis and marginal utility on the OY-axis

MU curve shows the decreasing trends of all the units of apples. The 5th unit of apple gives zero MU while the 6th unit gives negative marginal utility. A is the point of satiety thereafter consumers should not consume additional unit of apple. There are three stages of marginal utility as given below:

1. MU shows a decreasing trend upto 4th unit of apple but it is positive.
2. MU is zero at the 5th unit of apple and it is the satiety point. Consumer should not consume after this point.
3. MU becomes negative with the consumption of 6th unit of apple.

Important links

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