LAW OF DIMINISHING MARGINAL UTILITY

 Good morning HI HELLO

 My topic is the Law of diminishing marginal utility
This law was first proposed by Prof. Gossen but was discussed in detail by Prof.
Alfred Marshall in his book ‘Principles of Economics’ published in 1890. The law of
diminishing marginal utility is universal in character. It is based on the common
consumer behaviour that utility derived diminishes with the reduction in the intensity
of a want.

According to Prof. Alfred Marshall, “Other things remaining constant, 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.”
 It is part of a broader concept that is consumer behaviour
 Who is a consumer-- A consumer is a person who purchases
goods and services for the satisfaction of needs and
wants.
 So, what is consumer behaviour-- Consumer Behaviour is the
study of individual customers, organizations, or groups’
behaviour while selecting, purchasing, using, and
disposing of the goods, ideas, and services so they can
meet their wants and needs.
 What is utility? In economics it is said to the feeling of happiness
or satisfaction a consumer gets after using certain goods – ex – Ice
cream.
 Consumer behaviour can be studied in two manners
1) Cardinal utility -- Under the cardinal utility approach, we
assume that the utility level can be measured and expressed in
numbers. Ex—A child ate 2 ice creams which gave him
satisfaction like 10. Here we will discuss cardinal
2) Ordinal utility. -- In real-life, we cannot measure their satisfaction level
in numbers. However, we can rank our preferences amongst the
alternatives by expressing which commodity gives less or more utility.
Like a child preferring Pizza over burger!
 The two different measures of utility under cardinal
utility are:

1) Total Utility-- the total satisfaction level derived by a consumer

from the consumption of a given commodity.
2) The marginal utility of a commodity is the change in its total
utility because of the consumption of one additional unit of the
commodity.
 Law of diminishing marginal utility -- The law of diminishing marginal
utility states that as a consumer consumes more of a commodity, the marginal
utility derived from every additional unit consumed will decrease. The law of
demand is based on the law of diminishing marginal utility. It means that a
consumer is ready to spend less money for more units of a product as the
utility level for the commodity decreases with the increase in consumption.
 

Assumptions for the law of diminishing marginal utility are:

 There is continuous consumption of a commodity.
 The consumer is consuming only standard units of a commodity.
 The satisfaction level is measured in numerical or quantitative terms.
 The quality of a commodity does not change.
 The consumer consuming the commodities is rational.
 The income of the consumer and the price of the commodity are fixed.

 there are some limitations to the law of diminishing marginal utility.

The law will not operate properly, or may not even apply, if:

 The units being consumed are very small.

 The units being consumed are of different sizes.
 There are long breaks in between consuming the units.
 The consumer is thinking or behaving irrationally, or the consumer
is suffering from a mental illness or addiction.
 also, will not apply if the commodity being considered is money. The
utility of money does not decrease as a person acquires more of it.

Following are the Exceptions to the law of diminishing marginal utility:

1) Hobbies: In certain hobbies like the collection of various stamps and coins, rare
paintings, music, reading, etc., the law does not hold true because every additional
increase in the stock gives more pleasure. This increases marginal utility. However,
this violates the assumption of homogeneity and continuity.
2) Miser: In the case of a miser, every additional rupee gives him more and more
satisfaction. The marginal utility of money tends to increase with an increase in his
stock of money. However, this situation ignores the assumption of rationality.

3) Addictions: It is observed in the case of a drunkard that the level of

intoxication increases with every additional unit of liquor consumed. So MU
received by drunkard may increase. Actually, it is only an illusion. This condition is
similar to almost all addictions. However, this violates the assumption of rationality.

4) Power: This is an exception to the law because when a person acquires power, his
lust for power increases. He desires to have more and more of it. However, this again
violates the rationality assumption.

5) Money: It is said that the MU of money never becomes zero. It increases when
the stock of money increases. This is because money is a medium of exchange
that is used to satisfy various wants. However, according to some economists, this
law is applicable to money too. For example, the marginal utility of money is more to
a poor person than to a rich person.

However, these, exceptions are only apparent. Since they violate some or the other
assumptions of the law and hence, they are not real exceptions

Conclusion

The law of diminishing marginal utility predicts how consumers will react to
a certain level of supply. As they consume more units of a single type of
good, the utility of each unit will decrease until the consumer does not
want anymore. Businesses can use the law of diminishing marginal utility
to understand consumer behaviour, price their goods and services, and
diversify their offerings.