Q.Describe the law of diminishing marginal utility, its limitations and importance.
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Start your 14-day free trial to unlock the full solution →The Law of Diminishing Marginal Utility (Marshall) says that the more units of a good a consumer takes in a given time, the smaller the marginal (extra) utility of each successive unit, eventually reaching zero (satiety) and then becoming negative. It assumes rationality, suitable and continuous units, constant income, tastes and prices. Limitations: it does not apply to money, rare collections, intoxicants, very small or dissimilar units. Importance: it underlies the law of demand, consumer's equilibrium (law of equi-marginal utility), the paradox of value, and the justification for progressive taxation.
Statement of the Law
As a consumer consumes more and more units of a commodity, the additional satisfaction (marginal utility) derived from each successive unit goes on diminishing, provided tastes, income and prices remain unchanged. For example, the first glass of water to a thirsty person gives great satisfaction, the second less, the third still less, until a point of satiety is reached where marginal utility becomes zero; beyond that it becomes negative (disutility).
Assumptions
- The consumer is rational and aims at maximum satisfaction.
- Units of the good are of standard size and suitable.
- Consumption is continuous, without a long time gap.
- Income, tastes, preferences and prices of related goods remain constant.
- Utility is measurable in cardinal numbers (utils).
Limitations / Exceptions
- Rare collections — for hobbies like collecting stamps or coins, additional units may give more satisfaction.
- Money — the desire for money is said not to diminish (though economists debate this).
- Intoxicants — a drunkard may get more satisfaction from each additional drink.
- Dissimilar or unsuitable units — if units are of different size/quality the law may not hold.
- Change in income, taste or fashion — if these change the law breaks down.
Importance of the Law
- Basis of the Law of Demand — because marginal utility falls, a consumer buys more only at a lower price, explaining the downward-sloping demand curve. …
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