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 (DMU), given by Alfred Marshall, says that other things remaining equal, the marginal utility obtained from each successive unit of a commodity goes on falling as consumption increases. It rests on several assumptions, has recognised limitations (money, hobbies, rare goods, small units, abnormal persons), and is very important for explaining demand, consumer equilibrium, value paradox and public policy.
Meaning and statement
Utility means the want-satisfying power of a commodity. Marginal utility is the addition made to total utility by consuming one more unit of a good. Marshall stated the law as: "The additional benefit which a person derives from a given increase in his stock of a thing diminishes with every increase in the stock that he already has." In simple words, the more of a thing we have, the less satisfaction each extra unit gives.
Illustration
Suppose a thirsty person drinks glasses of water:
| Units of water | Total Utility | Marginal Utility |
|---|---|---|
| 1 | 20 | 20 |
| 2 | 35 | 15 |
| 3 | 45 | 10 |
| 4 | 50 | 5 |
| 5 | 50 | 0 |
| 6 | 45 | -5 |
As units increase, marginal utility falls (20, 15, 10, 5), becomes zero at the point of satiety (5th unit) and then turns negative, while total utility rises at a decreasing rate, reaches a maximum and then falls.
Assumptions
- The units consumed are of standard and identical quality.
- Consumption is continuous, without a long time-gap between units.
- Tastes, preferences, income and prices of the consumer remain unchanged.
- The consumer is rational and measures utility in cardinal numbers (utils).
Limitations / exceptions
- Money: marginal utility of money is often said not to diminish, because the desire to accumulate wealth may grow.
- Hobbies and rare collections: for a collector of coins, stamps or paintings, extra units may give more satisfaction.
- Very small units: a single drop of water or a crumb of food does not give proper satisfaction, so the law may not operate.
- Abnormal persons: misers, drunkards and addicts may derive more satisfaction from additional units.
- Change in conditions: if income, taste or fashion changes, the law breaks down.
Importance
- It is the basis of the downward-sloping demand curve and hence the Law of Demand: a consumer buys more only at a lower price because marginal utility falls. …
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