Law of Diminishing Marginal Utility-Assumption & Limitations

Law of Diminishing Marginal Utility has been defined by Marshall as;

“The additional benefit which a person derives from an increase of his stock of a thing diminishes with every increase in the stock that he already has.”

The law of diminishing marginal utility defines the general human behavior. As you have more of a thing, your desire for the extra unit will become less intense.  In other words, you can say that the marginal utility decreases as the number of the commodity increases in your stock.

The utility is the satisfaction one gets from consuming the product. Whereas, marginal utility is the satisfaction obtained from the additional unit of consumption. According to the law, the marginal utility decreases with the additional units of consumption. Since human want is satisfied by the first unit, so the desire for the later ones becomes less intense.

Law of Diminishing Marginal Utility Example:

Let us suppose that a person is hungry. So, he starts consuming an apple. Initially, when he is hungry he will get higher satisfaction from the first unit of apple. Now, he has satisfied his want to some extent. If he consumes the second unit of apple, the marginal utility will be lesser than the first unit of apple. This process continues until he gets full satisfaction.

He gets the highest satisfaction when the marginal utility becomes zero. Thus, the total utility increases at a diminishing rate. A rational consumer will stop consumption when marginal utility is zero. After this, the marginal utility becomes negative and total utility starts falling.

Law of Diminishing Marginal Utility Schedule:

Let us explain the law of diminishing marginal utility with the help of this simple schedule.

Law of diminishing marginal utility

As you can see in the above table. When the person is hungry and starts eating a burger. The first unit of burger gives him 20 Utils as marginal utility. He then gets satisfaction to some extent, the utility from the second unit will be lesser. The Second unit of the burger gives him 15 Utils. The marginal utility of every additional unit decreases. So, the marginal utility of the 3rd unit till 7th unit keeps on diminishing i.e. 10, 5, 0, -5 & -10. This is obviously what law of diminishing marginal utility explains.

Whereas, at the 5th unit of consumption, the marginal utility becomes zero. This is the point where total utility is maximum and this is also called a point of satiety. After this, the TU starts decreasing and the marginal utility becomes negative.

Law of Diminishing Marginal Utility Graph:

Law of diminishing marginal utility graph

 

Law of Diminishing Marginal utility Assumptions:

Same nature of the product

For the law of diminishing marginal utility to be true, the units of consumption should be similar. The units of a commodity should be similar in every manner. If the units were not identical. If you consume the sour apple first and the sweet apple second. Then the marginal utility may increase instead of falling. So, the law will not be applicable due to different nature of the product.

Suitable units of Consumption

The size of the commodity should neither be too big nor too small. That is, if the first unit of consumption is too big, you may become satisfied before the unit ends. Hence, the law of diminishing marginal utility will not be applicable.

Continuous use of the product

The consumption pattern should be continuous. The law will be applicable when you consume the product continuously. Suppose a person gets one unit of apple in the morning and the second unit at night. Then, a marginal utility may not diminish.

Rational Consumer

A consumer is a rational who can measure, calculate and also compare the utility he gets from the different units of a commodity. Thus, a rational consumer maximizes his total satisfaction.

Durable Goods

The goods should not be durable goods. Because in this case, the utility may rise instead of falling. For example, a person’s utility may increase as he gets more and more of a durable good. If he gets the third unit, fourth or fifth unit of the car, he may be more satisfied and his utility may increase instead of falling.

Law of Diminishing Marginal Utility Exceptions and Limitations:

There are some exceptions & limitations to the law of diminishing marginal utility which is as follows;

Knowledge

Some economists say that the desire for knowledge never falls. Therefore, the MU of additional knowledge increases. However, the MU of a higher school is degree is more than the Primary degree. So, the homogeneity condition of the law is violated. That’s why the law of diminishing marginal utility will not be applicable. Contrary to that, if the same book is read again and again. Its Marginal utility will obviously fall.

Money

Money is something for which marginal utility never falls. It increases as you get more and more units of money. So, the law of diminishing marginal utility is not applicable here. Because as one gets more money, the desire for it increases instead of falling.

Music

Music is something where a musician’s MU does not fall. As he gets more musical instruments, his marginal utility increases.

Ostentation

If someone feels pride in buying the certain product. His utility will not diminish with the additional unit. Similarly, if someone has a general tendency of showing off. The marginal utility of additional unit will not decrease in this case. As you buy more units, you get more satisfied.

Drugs

A person who takes drugs may get more satisfaction with the additional unit of drugs. So, the law will not hold true in the case of drugs.

Hobbies

Suppose you have a hobby of collecting stamps. As you collect additional stamps. The marginal utility of the stamp increases instead of falling. So, the law of diminishing marginal utility is also not applicable in case of hobbies

Leave a Reply

Your email address will not be published. Required fields are marked *