Q.Explain the Law of Diminishing Marginal Utility and state its limitations.

The Law of Diminishing Marginal Utility (Marshall) states that as a consumer goes on consuming more and more units of a good at a given time, the marginal utility derived from each additional unit goes on decreasing. Its main limitations are that it fails when consumption is not continuous, when units are too small or unlike, when tastes change, and in the case of money, rare articles and abnormal behaviour.

Meaning

Utility is the want-satisfying power of a commodity. Marginal utility is the addition made to total utility by consuming one more unit of the good. The law, explained by Alfred Marshall under the cardinal (measurable) utility approach, says that the more of a thing a person already has, the less satisfaction an extra unit gives. Total utility rises but at a diminishing rate, becomes maximum when marginal utility is zero (point of satiety), and then falls when marginal utility turns negative.

Illustration with a utility schedule

Suppose a hungry person eats apples one after another. The first apple gives, say, 20 units of utility, the second 16, the third 12, the fourth 8, the fifth 4, the sixth 0 and the seventh minus 4. Total utility keeps rising up to the sixth apple and then starts falling, while marginal utility steadily declines from 20 to a negative figure. Plotted on a graph with units consumed on the horizontal axis and marginal utility on the vertical axis, the marginal-utility curve slopes downward from left to right and cuts the horizontal axis when utility becomes zero.

Assumptions

• Consumption is continuous, in one single stretch of time.
• The units of the commodity are standard and of the same size and quality.
• The consumer is a rational, normal person.
• Tastes, preferences, fashion and income remain unchanged.
• Suitable units are consumed, neither too large nor too small.

Limitations (exceptions)

• Money: The law is said not to apply to money, because the desire to hold more money generally does not diminish; a richer person may even want more money. …