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Introduction
The law of diminishing marginal utility was first propounded by 19th century German economist H.H. Gossen which explains the behavior of the consumers and the basic tendency of human nature. Hence,
this law is also known as Gossen’s
First Law. This law was further modified by Marshall.
This law states that, if the consumer consumes goods
continuously, the utility obtained from every successive unit goes on
diminishing. If the consumer is consuming the goods continuously, firstly he
reaches the point of maximum satisfaction which is known as level of satiety.
If he continues to consume the goods again, the utility obtained from that
particular goods goes in negative aspect or he gets inutility.
Law Of
Diminishing Marginal Utility Assumptions
1. The consumer mut be rational.
2.
The goods which are to be consumed should be equal in size and
shape.
3.
Consumer should consume the goods without time gap.
4.
The consumer’s income, preference, taste and fashion should not be
changed while consuming the goods.
5.
Utility should be measured in cardinal numbers.
6.
Marginal utility of money should remain constant during
consumption of the goods.
Example to
Demonstrate Law of Diminishing Marginal Utility
This law can be illustrated with the help of a table shown below:
The table shows that when a consumer consumes 1st unit
of orange he derives the marginal utility equal to 6utils. As the consumer
consumes 2nd and 3rd units of orange, the
marginal utility is declined from 4utils to 2utils respectively.
When he consumes 4th unit of orange the marginal
utility becomes zero, which is called the point of satiety. Similarly, from the
consumption of 5th and 6th units of orange, the
marginal utility becomes negative, i.e., he gets disutility instead of utility
from these units of consumption.
Thus, the table shows that a consumer consumes more and more units
of a commodity at a certain period of time, the marginal utility declines,
becomes zero and even negative.
This law can be further explained with the help of a diagram:
In the figure, X-axis represents units of orange and Y-axis represents utility. MU is the marginal utility curve which slopes downward from left to right. It means that as a consumer consumes more and more units of a commodity, the marginal utility he derives from the additional unit of consumption goes on declining, becomes zero(at point D) and even negative(at point E and F.)
Exceptions Where Law of Diminishing Marginal Utility Doesn’t Apply
1.
Dissimilar
units
This law is applicable for homogenous unit only, i.e. only if all
units of a commodity consumed are similar in length, breadth, shape and size.
If there is a change in such factors, the utility obtained from it can be
increased. For example: If the 2nd orange is much larger than
the 1st one, it will yield more satisfaction than the 1st.
2.
Unreasonable
quantity
The quantity of the commodity a consumer consumes should be
reasonable. If the units of consumption are too small, then every successive
unit of consumption may give higher utility to the consumer. For example: If a
person is given water by a spoon when he is very thirsty, each additional
spoonful will give him more satisfaction.
3.
Not a
suitable time period
There should not be very long gap between the consumption of
different units of the commodity. If there is time lag between the consumption
of different units, then this law may not hold good. For example: If a man has
lunch at 10 a.m. and dinner at 8 p.m. and eats nothing in between, the dinner
will possibly yield even more satisfaction than the lunch, i.e. his marginal
utility will not diminish.
4.
Rare
collection
This law does not apply for rare collections such as old coins, stamps and so on because the longer and larger the number he collects, the greater will be the utility.
5. Change in taste and fashion of the consumer
The law of diminishing marginal utility will be applicable only if
the consumer is not supposed to change taste and fashion of the commodity
whatever he/she was using previously.
6.
Abnormal
person
The law of diminishing marginal utility is applicable for normal
person only. Abnormal persons such as drunkards and druggist are not associated
with the law.
7.
Change in
income of the consumer
To hold the law good, there should not be any change in the income
of the consumer. If the income of the consumer increases, he will consume more
and more units of a commodity which he prefers. As a result, utility can be
increased rather than decreased.
8.
Habitual
goods
The law will not be applicable for habitual goods such as
consumption of cigarettes, consumption of drugs, alcohol, etc.
9.
Durable and
valuable goods
The law is not applicable in case of durable goods as well as
valuable goods such as buildings, vehicles, gems, gold, etc.
https://www.businesstopia.net/economics/micro/law-diminishing-marginal-utility
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