Law of Diminishing Marginal Utility
It is very important and the first law of consumption. It based on every day experience of human life that when we use units of a commodity continuously the lateral units give less and less satisfaction to the consumer. In the beginning, we have strong desire to consume units of commodity but with the continuous consumption the desire for commodity to consume diminishes, as the want is satisfied.
When the want is satisfied utility reaches to zero and then with the excessive use of units of commodity the utility become negative. The law of diminishing marginal utility expresses the decreasing relationship between the units of commodity consumed and the marginal utility of each unit of the commodity.
Suppose a thirsty person starts drinking water continuously. The first glass of water gives him maximum utility, the second glass of water gives him less utility and the utility of the third glass of water is less than the previous one and so on. The additional utility diminishes with every successive glass of water till it goes down to zero and by excessive consumption, the utility may be negative.
The law is relevant for a particular period of time, the law may be defined as:
According to Alfred Marshall:
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.
According to Paul A. Samuelson:
As the amount consumed of a good increase the marginal utility of that good tends to decrease.
According to Chapman:
The more quantity of good you have, the less desirous you will be for a more increase in it.
Or in simple words we can say:
“Other things remaining the same, continuous use of units of a commodity gives less and less marginal utility till it reaches to zero and then becomes negative”.
Explanation by an Example:
Law of diminishing marginal utility can be explained with the help of a schedule.
It is clear from the schedule that when our hypothetical consumer consumes units of a commodity continuously, marginal utility is diminishing and reaches to zero and then becomes negative.
Up till 5th unit marginal utility. is positive, at 6th-unit marginal utility. is zero and at 7th unit marginal utility is negative.
The law can also be explained with the help of a diagram.
Explanation of the Diagram:
In the diagram units of commodity consumed (being independent variable) have been measured on X-axis and marginal utility has been measured on Y-axis (being dependent variable) marginal utility curve has been drawn by Joining points a, b, c, d and g. It slopes downward which show that with an increase in units, marginal utility diminishes, reaches to zero and becomes negative.
We may conclude that law of diminishing marginal utility holds due to two reasons
- i) Each particular want is satiable.
- ii) Goods are imperfect substitutes for one another and they tend to be consumed in appropriate proportions.
The Law of diminishing marginal utility is based on the following assumptions:
The law holds only when units of a commodity are consumed continuously. If there is a gap or interval between the consumption of units then utility may increase instead of diminishing e.g, if we take lunch at 2 p.m. and the dinner at 8 p.m. At dinner utility has increased instead of diminishing because of gap or interval of 6 hours.
The law applies when units consumed are of suitable size e.g., when a person is thirsty and he starts drinking water drop by drop the utility of water will increase instead of diminishing, because the units consumed are not of suitable size. It is assumed that the units consumed should be homogenous. If the lateral units are superior to the previous units the utility of lateral units will increase instead of diminishing
No change in Consumer’s Taste:
It is assumed that taste of the consumer remains unchanged. If the taste of the consumer changes during consumption, the law does not hold e.g. student is eating an apple and during consumption he is told that apples are more useful for his memory, the utility will increase.
Consumer’s Income does not Change:
The law holds good when there la no change in the income of the consumers e.g., if the income of the consumer increases his purchasing power will increase and demand for goods and services increases which shows more value L.e., greater utility.
Following are the limitations of the law:
The law does not apply on knowledge:
As a person acquires more and more knowledge his desire for getting more knowledge increases e.g., knowledge of different languages gives more and more utility to a person.
Income and Wealth:
It is argued that as income of a person increases his desire to earn more income also increases, because more income means more wants to be satisfied.
Utility of a commodity depends upon fashion, and ostentation. A dress in fashion or used to snob or ostentation, has greater utility and a dress out of fashion has less utility.
The law does not apply to rare collections. A person who is collecting old stamps the more he is able to collect stamps, the greater will be his satisfaction.
The law does not hold good in case of intoxicants. A person who is addict of intoxicants his utility for successive units increases instead of decrease.
The law induces the consumers to maximize their utility. They can spend their income on many commodities instead of one commodity. They can get maximum utility out of their spending. So, consumers benefit from this law while purchasing goods. When a consumer purchases goods he compares the marginal utilities of the commodities purchased and the price paid. If the M.U. is greater than the price, the consumer purchases more and stops purchasing when M.U. is equal to price.
For Taxation/Finance Minister:
We know that M.U. of money for rich is less than the poor. The law provides the basis for taxing or changing the tax rates. Finance Minister benefits from this law. Higher tax rate is imposed on rich and lower tax rate on poor because M.U. of money for poor is more while less for rich. So, the law is useful for tax authorities There should be high taxes on luxury goods. There must be low taxes on necessities of life. The marginal utility of money to the poor is much higher than rich person.
The law forms a basis of theory of value. It explains how with an increase in supply (demand remains the same) the value of commodity falls.
Value in Exchange:
The law explains which commodities have value in exchange. Air has value in use but no marginal utility while goods have value in exchanges because they possess marginal utility.
Basis for some Economic Laws/ Theories:
Economic laws e.g., law of equi. marginal utility has been derived from this law. The concept of elasticity of demand, consumer’s surplus depends upon this law. Law of demand also depends on this law.
Law of Equi-Marginal Utility:
The law of equi-marginal utility is based on the law of diminishing marginal utility. The consumers can get maximum utility by allocating income among commodities in such a way that last rupee spent on each item provides same marginal utility. The law of equi-marginal utility holds good when the law of diminishing marginal utility holds good.
Equal Wealth Distribution:
The law is helpful to government in socialist countries. There is desire of equal wealth distribution. It is possible by taxing the rich and providing grants to the poor. The rich sacrifice less and the poor gain more in terms of marginal utility.
Variety in Production:
The law induces the producers to supply variety of goods in the market. The consumers can get maximum satisfaction through such variety. Marginal utility of one product decreases very fast. The marginal utility of variety of products decreases at lesser rate.
Theory of Value:
The law helps to explain theory of value. When supply of commodity increases its price goes down. The fact is that when there Is increase in stock of commodity its marginal utility decreases.
The law explains equilibrium condition of consumers relating to single commodity and want ult shows the behaviour of rational consumers.
The law measures the utility in ordinal terms. Due to such measurement law is valuable. It is not useless at all. The law provides some knowledge to the reader.
The law states that diminishing utility is true for all types of consumption. The consumer is able to satisfy his individual wants. In fact, utility decreases with successive use of commodities