Law of Diminishing Marginal Utility

The law of diminishing marginal utility is a generalization drawn from the characteristics of human wants, H.H Gossen was the first to formulate this law in 1854. Marshall has stated the law of diminishing marginal utility as follows “The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has”. In other words, the law simply states that other things being equal, the marginal utility derived from successive units of a given commodity goes on decreasing. Hence the more we have of a thing; the less we want of it because every successive unit gives less and less satisfaction.

Assumptions :

1) All the units of the given commodity are homogenous i.e. identical in size shape, quality, quantity, etc.

2) The units of consumption are of reasonable size. The consumption is normal.

3) The consumption is continuous. There is no unduly long time interval between the consumption of the successive units.

4) The law assumes that only one type of commodity is used for consumption at a time.

5) Though it is a psychological concept, the law assumes that the utility can be measured cardinally i.e. it can be expressed numerically.

6) The consumer is a rational human being and he aims at maximum satisfaction.


The above table shows that when a person consumes no apples, he gets no satisfaction. His total utility is zero. In case he consumes one apple, he gains seven units of satisfaction. His total utility is 7 and his marginal utility is also 7. In case he consumes a second apple, he gains extra 4 utils (MU). Thus given him a total utility of 11 utils from two apples. His marginal utility has gone down from 7 utils to 4 utils because he has less craving for the second apple. The same is the case with the consumption of the third apple. The marginal utility has now fallen to 2 utils while the total utility of three apples has increased to 13 utils (7 + 4 + 2). In case the consumer takes the fifth apple, his marginal utility falls to zero utils and if he consumes the sixth apple also, the total utility starts declining and marginal utility becomes negative. Total utility and marginal utility from the successive units of the commodity are plotted in the figure below:


Importance of the Law:

1) Basic economic law and concepts: This law of DMU forms the basis of the law of demand, the law of Equi-marginal utility, the elasticity of demand, etc.

2) Public finance: The Govt. can impose and justify progressive income tax on the ground of this law, as the income increases, the MU of income diminishes.

3) Businessmen: A businessman or producer can increase the sale of his product by fixing a lower price. Since consumers tend to buy more to equate MU with price, a producer can expect a rise in sales.

Exceptions

1) Hobbies: In the case of certain hobbies like a stamp collection or old coins, every additional unit gives more pleasure. MU goes on increasing with the acquisition of every unit.

2) Drunkards: It is believed that each dose of liquor Increases the utility of a drunkard.

3) Miser: In the case of a miser, greed increases with the acquisition of every additional unit of money.

4) Reading: reading of more books gives more knowledge and in turn greater satisfactions




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