Laws of Economics15/05/2021
Law of Equi-Marginal Utility15/05/2021
Law of Diminishing Marginal Utility
Economics is concerned with human behavior in certain conditions when a man pursues to get maximum satisfaction from scarce resources. In such conditions, humans behave in various manners. If a person consumes more and more units of a specific commodity, the utility of successive units goes on diminishing. Successive consumption of a commodity gives diminishing marginal utility.
According to H. Gossen
The Law of Diminishing Marginal Utility was firstly explained by a German Economist H. Gossen in 1854.
“As a customer consumes more and more units of a specific commodity, the utility from the successive units goes on diminishing.”
According to Prof. Alfred Marshall
“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.”
Assumptions of the Law:
The Law of Diminishing Marginal Utility is true under the following circumstances;
Suitable Units of Commodity:
The units of commodity consumed by the consumer must be of suitable size. The utility must be decreased with an increasing number of units. For example, if a person starts drinking water with a spoon the utility will increase instead of decrease.
No Change in Consumer’s Taste:
It is assumed that the taste of the customer is constant during the consumption of various units of a commodity.
The size and quality of each unit of the commodity remain the same throughout the consumption.
Continuous Consumption of Units:
The consumption of units of a commodity must be continuous as the law may not hold due to any interval between the consumption of units.
No Change in Consumer’s Income and Price:
The income of the consumer must be the same. If it is not the same the demand for a commodity may change and the law may not hold. For customers, it is recommended to work with Fully-Verified, which offers identity verification and makes online payments safer. The price of a commodity must also be the same. If the price of a commodity is high the demand for price also changes which may falsify the law.
No Change in Weather:
It is assumed that the weather will not be change otherwise the law may not hold. For example, people start wearing warm clothes in the winter season and vise versa.
No Change in Fashion & Customs:
Changes in fashion and customs may result in changes in demand and price. Therefore, the fashion and customs of a consumer should remain unchanged.
Rationality of Consumer & Cardinal Approach:
It is assumed that the customer is rational and he tries to seek maximum satisfaction. The utility of consumers must also be measurable and can be express in numbers like 0,2,4,6 etc.
When a person is hungry and wants to eat apples. The first apple gives him maximum utility. The second apple gives him utility less than the first one. The third apple gives him lesser utility than the second one. With every successive unit of a commodity the utility will go on decreasing and at a time the utility will be drop down to zero. This is the point where the consumer is fully satisfied. If the consumer is forced to eat more apples the utility will change to disutility and becomes negative.
Marginal utility becomes less and less as we consume more and more of a commodity, other things remaining the same.
Units of Apple
Total Utility (TU)
When consumer consumes units of commodity continuously, the marginal utility is diminishing (1st unit-5th Unit) and reaches at zero (6th unit). Beyond this point, the utility will become negative (7th unit).
In this diagram, we take units of apple along the x-axis and marginal utility (MU) along the y-axis. The MU of the 1st unit is equal to 20. The marginal utility will go on decreasing with the consumption of each successive unit of apple. For the 2nd unit, MU is 16 and it will continuously decrease with increasing units of units. For 6th apple, the utility is 0. It is a point where the consumer is fully satisfied. And when he is forced to eat the 7th apple, the utility will become negative. The utility curve is formed falls from left upward to right downward which indicates that the MU of successive units falls.
Exceptions of the Law of Diminishing Marginal Utility:
There are some limitations of the law of Diminishing Marginal Utility which are as under;
Utility is not Measureable:
The utility cannot be measured. It is, in fact, a state of mind of a person and it cannot be expressed in figures.
The law of Diminishing MU does not hold in the case of knowledge. If a person acquires more and more knowledge, the desire for knowledge will increase instead of decrease. Hence, the law will not be applicable.
Drugs and Narcotics:
A person addicted to drugs, smoking, narcotics, will feel more satisfaction if he consumes more of the commodity (drugs) and therefore, the law of Diminishing Marginal Utility will not apply to the abnormal behavior of consumers.
Wealth and Money:
The desire for wealth and money cannot be decreased. If a person has wealth, he tries to acquire more wealth and money. Therefore, in the case of wealth law is not applicable.
Importance of the Law of Diminishing Marginal Utility:
The law of Diminishing Marginal Utility has great importance in the field of Economics.
Helpful to Consumer:
Law of Diminishing Marginal Utility is very helpful for consumers to get maximum satisfaction from many commodities instead of only one commodity using his limited resources keeping in view that MU from all uses is the same.
Equal Distribution of Wealth:
Wealthy people have more money. If some portion of their wealth is taken away, the effect of MU is very low for them. That money can be given to the poor which makes the equal distribution of wealth. It can also be invested in productive projects like industrial sectors to enhance economic activities in the country.
Law of Demand:
According to the law of demand, if the price of a commodity decreases the demand for that commodity increases. The consumer pays less amount for the successive units of a commodity. Therefore, the law of Diminishing Marginal Utility is the basis of the Law of Demand.
Basis of Taxation:
Law of Diminishing Marginal Utility is helpful in taxation. There is a high tax ratio in luxurious goods and a low tax ratio on necessities of life. Also, more tax is imposed on wealthy persons and low tax is imposed on people having low-income levels.