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The Law of Diminishing Marginal Utility

(Assumptions) | Economies
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Read this article to learn about the law of Diminishing Marginal Utility
(Assumptions) !

Law of diminishing marginal utility (DMU) states that as we consume more and more
units of a commodity, the utility derived from each successive unit goes on decreasing.

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In making choices, most people spread their incomes over
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People prefer a variety of goods because consuming more and more of any one good
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reduces the marginal satisfaction derived from further consumption of the same good.
This law expresses an important relationship between utility and the quantity
consumed of a commodity. Let us understand this law with the help of an example:

Suppose your father has just come from work and you offer him a glass of juice. The
first glass of juice will give him great satisfaction. The satisfaction with the second glass
of juice will be relatively lesser. With further consumption, a stage will come, when he
would not need any more glass of juice, i.e. when the marginal utility drops to zero.
After that point, if he is forced to consume even one more glass of juice, it will lead to
disutility. Such a decrease in satisfaction with consumption of successive units occurs
due to ‘Law of diminishing marginal utility’.

Law of DMU has universal applicability and applies to all goods and services. This law
was first given by a German economist H.H. Gossen. That is why, it is also known as
‘Gossen’s first law of consumption’.

Assumptions of Law of Diminishing Marginal Utility:

The law of DMU operates under certain specific conditions. Economists call them the
‘assumptions’ of this law.

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These are as follows:

1. Cardinal measurement of utility:

It is assumed that utility can be measured and a consumer can express his satisfaction
in quantitative terms such as 1, 2, 3, etc.

2. Monetary measurement of utility:

It is assumed that utility is measurable in monetary terms.

3. Consumption of reasonable quantity:

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It is assumed that a reasonable quantity of the commodity is consumed. For example,

we should compare MU of glassfuls of water and not of spoonful’s. If a thirsty person is
given water in a spoon, then every additional spoon will yield him more utility. So, to
hold the law true, suitable and proper quantity of the commodity should be consumed.
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4. Continuous consumption:
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It is assumed that consumption is a continuous process. For example, if one ice-cream
is consumed in the morning and another in the evening, then the second ice-cream may
provide equal or higher satisfaction as compared to the first one.

5. No change in Quality:

Quality of the commodity consumed is assumed to be uniform. A second cup of ice-

cream with nuts and toppings may give more satisfaction than the first one, if the first
ice-cream was without nuts or toppings.

6. Rational consumer:

The consumer is assumed to be rational who measures, calculates and compares the
utilities of different commodities and aims at maximising total satisfaction.

7. Independent utilities:
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It is assumed that all the commodities consumed by a consumer are independent. It

means, MU of one commodity has no relation with MU of another commodity. Further,
it is also assumed that one person’s utility is not affected by the utility of any other
person.

8. MU of money remains constant:

As a consumer spends money on the commodity, he is left with lesser money to spend
on other commodities. In this process, the remaining money becomes dearer to the
consumer and it increases MU of money for the consumer. But, such an increase in MU
of money is ignored. As MU of a commodity has to be measured in monetary terms, it is
assumed that MU of money remains constant.
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It is assumed that income of the consumer and prices of the goods which the consumer
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wishes to purchase remain constant.

It must be noted that ‘Utility approach to Consumer’s Equilibrium’ is based on all these
assumptions.

Diagrammatic Explanation of Law of DMU:

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Let us understand the law with the help of Table 2.2 and Fig. 2.2:

Table 2.2: Law of Diminishing Marginal Utility

Units of Ice Total Utility (in Marginal Utility (in utils)

Cream utils)

1 20 20

2 36 16

3 46 10

4 50 4

5 50 0 (Point of Satiety)

6 44 -6

In the diagram, units of ice-cream are shown along the X-axis and MU along the Y-axis.
MU from each successive ice-cream is represented by points A, B, C, D and E. As seen,
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the rectangles (showing each level of satisfaction) become
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increase in consumption of ice-creams.

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MU falls from 20 to 16 and then to 10 utils, when consumption is increased from 1st to
2nd and then to 3rd ice-cream. 5th ice-cream has no utility (MU= 0) and this is known as
the ‘Point of satiety’. When 6th ice-cream is consumed, MU becomes negative. MU
curve slopes downwards showing that MU of successive units is falling.

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Related Articles:
1. The Concept of Utility: It’s Meaning, Total Utility and Marginal Utility | Economics
2. Law of Diminishing Marginal Utility (Explained With Diagram)

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