Law of diminishing marginal utility
The law of diminishing marginal utility states that as a person consume more and more his or her marginal utility (MU) will decrease. Means after consuming more and more unit of a commodity decrease the satisfaction level of the consumer. First, it MU becomes zero and then zero converted into negative.
The law of diminishing marginal utility has been started by Alfred Marshall as “The additional utility which a person derives from an increase of his stock of a commodity diminishes with every increase in the stock that he or she already has.” OR
In other words, “other things remaining same when a person takes successive units of a commodity, the marginal utility diminishes constantly.”
In 1854, H. Gossoon explained this law after Alfred Marshall in the following words; “other things remaining same, marginal utility becomes smaller and smaller as the more units of a commodity a person has.”
EXPLAINATION OF THE LAW:
The law can be explained by the following example;
Suppose that, in the month of June when it is very hot. A student comes to home from his/her college and starts drinking water because he/she is very thirsty. First, glass of water gives him lot of satisfaction. In other words, the first glass of water has a great utility for him/her. If he/she drinks the second glass the utility will be less than the first one. If he/she takes the third glass then the utility will be less than the second glass and so on……
The utility goes on diminishing with the consumption of the standard from utility function corresponding to above say by the law is;
Utility (U) =f(Q)
“From utility we mean, the power of a good to satisfy human wants”.
Every next unit, it drops down to zero. If the consumer is forced further, the utility will be negative.
Glass of water Total Utility (TU) Marginal Utility (MU)
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
MU downs, but is +ive
TU is Max, MU =0
TU falls, MU is -ive
EXPLANATION OF SCHEDULE:
There are three columns in the schedule when student drinks first glass of water the ‘TU’ and ‘MU’ is equal. TU is 18 and MU is 8 on second glass. Marginal utility is zero after the use of fourth and fifth glass and TU is 30 on sixth glass. MU is -2 on seventh glass. After this TU becomes smaller and smaller.
EXPLAINATION OF DIAGRAM:
® In the beginning, TU increases and MU falls but it is still positive.
® When TU is maximum MU = 0 (This is the saturation point of consumer).
® When TU falls MU is negative.
Following are the assumptions that must be hold for this law.
® Nature of Commodity
® Reasonable Units
® Continuous Use
® No Change in Income
® No change in Customs, Fashion etc.
® Rare Collection
® No Change in Character.
® No Change in the Stock of other People
Nature of Commodity:
There should be no change in the nature of the commodity. For example, if first mango is not better while the second is better, then the utility will not decrease.
It is assumed that the units of commodity should be suitable and reasonable. If the units are too small then this law will not operate.
The units of the commodity should be used continuously. If there is interval between the consumption of the same two units then the law will not operate.
No Change in Income:
If there is a sudden change in the income of the consumer the law may not applicable. Because he/she will move towards the inferior goods
No Change in Customs, Fashion etc.:
If there is a sudden change in the fashion or taste of the consumer, it cannot be operate.
If there are two diamonds in the world the possession of second diamond will push up the marginal utility.
No Change in Character:
The character of the consumer does not change. For example, if a consumer develops the taste for wine the every next unit of wine may increase the marginal utility.
No Change in Stock of other People:
Sometimes an increase in the stock of a commodity increases the marginal utility. For example, the number of telephones increases in the city the marginal utility automatically increases.
LIMITATIONS OF THE LAW:
Following are the limitations of the law.
® Desire of Money
® Desire of Knowledge
® Personal Hobby
® Precious Goods
® Narcotics (Irrational behavior)
® Historical Things
® Science and Art
Desire for Money:
This law is not applicable in case of money an increase in wealth; man wants to get it more and more.
Desire of Knowledge:
Some experts say that man wants to get more and more knowledge, so the law cannot be applied in this case.
In case of personal hobby this law will not be operating. For example, as the collection of tickets, increases his/her utility also.
Further Explain Yourself