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Law of diminishing marginal utility

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The law of Diminishing Marginal Utility

The law of Diminishing Marginal Utility describes a familiar and fundamental tendency of human behavior. According to this law,” As a consumer consumes more and more units of a specific commodity, the utility from the successive units goes on diminishing.”

Mr. Herman Henrich Gossen, a German economist, was first to explain this law in 1854 AD. So, it is also known as the first law of Gossen.

Alfred Marshall later on restated this law as,” The additional benefit which a person derives from an increase of his stock of thing diminishes with every increase in the stock that he already has.”

This law is based on two important facts:
  1. Although human wants are unlimited, every single want is satiable.
  2. Commodities are not perfect substitutes of each other.


Assumptions of the law of Diminishing Marginal utility

  1. The utility is measurable in quantitative terms.
  2. A rational consumer aims at the maximization of his utility.
  3. It is necessary that a standard unit of measurement is constant.
  4. A commodity must be taken continuously; the gap should be suitable between the consumption of two consequent commodities.
  5. There should be the same goods as the same quantity, proper units of goods consumed by the consumer.
  6. It is assumed that various units of a commodity are homogeneous in characteristics.
  7. The taste of the consumer remains the same during the consumption of the successive units of the commodity.
  8. The income of the consumer remains constant during the occurrence of the law of marginal utility.
  9. It is assumed that the commodity is divisible.
  10. There should be no change in fashion.
  11. It is assumed that the price of the substitute does not change.
The behavior of a consumer is indicated in the following schedule:
Units of Commodity (Water)
Marginal utility (MU)
Total utility (TU)
First glass of water
8
8
Second glass of water
6
14
Third glass of water
4
18
Fourth glass of water
2
20
Fifth glass of water
0
20
Sixth glass of water
-2
18


On taking the first glass of water, the consumer gets 8 utils because he is very thirsty. When he takes a second glass of water, his marginal utility goes down to 6 utils because his thirst is partially quenched. The process continues until the marginal utility drops down to zero which is a saturation point. By taking the sixth glass of water, the marginal utility becomes negative because the thirst of the consumer has already been fully quenched.

The law of diminishing marginal utility can be explained by the help of the following diagram:

Law of diminishing marginal utility
In the above figure, the marginal utility of different units of commodity and units of a commodity is measured along y-axis and x-axis respectively. The points are the combination points of Units and marginal utility. By joining these points, we get the marginal utility curve. It is downward sloping which intersects x-axis (at 5 units) where MU is zero. Beyond this point, MU becomes negative. So, there is an inverse functional relationship between the units of commodity and the marginal utility of that commodity.

Exception or limitation of law of Diminishing Marginal utility

  1. This law does not hold well in the case of rare collection. E.g; a collection of ancient coins, stamps, etc.
  2. This law is not fully applicable to money. The marginal utility of money declines with richness but never falls to zero.
  3. It does not apply to knowledge, art, and innovations.
  4. The law is not applicable to precious goods like ornaments.
  5. Historical things are also included in the exceptions.
  6. Law does not operate if consumer behaves in an irrational manner.
  7. This law does not apply to beauty and decoration.
  8. If a dress comes in fashion its utility goes up, on the other hand, its utility goes down if it goes out of fashion.
  9. The utility increases due to the demonstration. It is a natural element.

Importance of the law of Diminishing Marginal utility

  1. By purchasing more amount of any commodity, the marginal utility declines. Due to this behavior, the consumer cuts his expenditure to that commodity.
  2. In the field of public finance, this law has a practical application, imposing a heavier burden on rich people.
  3. This law is the basis of some other economic laws such as the law of demand, the elasticity of demand, consumer surplus and the law of substitution, etc.
  4. The value of commodity falls by increasing the supply of a commodity. It forms a basis of the theory of value. So, it helps to determine prices too.

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