Q.Explain the law of diminishing marginal utility and its limitations.

The Law of Diminishing Marginal Utility (Marshall) says the extra satisfaction a consumer gets from each additional unit of a good falls as more units are consumed, until it reaches zero (point of satiety) and can turn negative. It holds only under its assumptions, and has well-known exceptions such as rare collections, intoxicants, misers and music.

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 states that as a person consumes successive units of the same commodity in a given period of time, the marginal utility derived from each additional unit keeps on diminishing.

The law explained with a schedule

Suppose a hungry person eats apples one after another:

Total utility rises at a decreasing rate, marginal utility falls steadily, becomes zero at the 6th unit (point of satiety), and turns negative thereafter. This is the essence of the law.

Assumptions

• The consumer is rational and aims at maximum satisfaction.
• Utility is cardinally measurable.
• Units of the commodity are homogeneous (identical in size and quality).
• Consumption is continuous, without a long time gap.
• Income, tastes, habits and prices of related goods remain constant.
• The units consumed are of a suitable (normal) size.

Importance

The law explains why the demand curve slopes downward, forms the basis of consumer equilibrium and the law of equi-marginal utility, and helps the government justify progressive taxation (money has lower marginal utility for the rich).

Limitations / Exceptions

1. Rare collections and hobbies — for a collector of old coins, stamps or rare paintings, each additional piece may give more satisfaction, not less.
2. Intoxicants — for a drunkard, each successive peg of liquor appears to give greater satisfaction, at least up to a point.
3. Misers and money — the more money a miser accumulates, the greater his desire for still more; marginal utility of money seems to rise. …