The law of diminishing marginal utility states that as a consumer consumes successive units of a commodity, a point is eventually reached where consumption of an additional unit yields less satisfaction.
The Law of Diminishing Marginal Utility is an economic concept that states that as a person consumes more units of a good or service, the additional satisfaction or utility derived from each additional unit of the good or service decreases. In other words, the more of something you have or consume, the less satisfaction you get from each additional unit.
For example, let’s say you are really thirsty and you drink a glass of water. The first glass of water will give you a lot of satisfaction because it quenches your thirst. But as you continue to drink more glasses of water, the additional satisfaction you get from each additional glass of water will decrease until eventually, you may not even want to drink any more water.
The Importance of the Law of Diminishing Marginal Utility
The Law of Diminishing Marginal Utility is important because it helps explain why people make choices and how they allocate their resources. When people consume goods or services, they try to maximize their total utility or satisfaction. But because of the law of diminishing marginal utility, people will eventually reach a point where the additional satisfaction they get from consuming more of a good or service is no longer worth the additional cost or effort required to obtain it.
In other words, it states that satisfaction derived from consuming successive units of a commodity will diminish as the
consumption of the commodity increases, is, the total utility increases as more commodity is consumed but increases at a diminishing rate.
The concept of diminishing marginal holds that as additional units of a commodity are consumed, less and less satisfaction is added to total utility and later adds nothing to total utility and later adds nothing to total utility.
Further consumption leads to negative values, then total utility diminishes as reflected in the total
utility curve dropping downwards.
For example, a person just coming to sunny, hot weather will definitely need some cups of cold water to quench his thirst. The first three, four may give him maximum satisfaction.
After that, decreases in satisfaction sets more and more cups of water are consumed until he/she is in a position not to consume anymore. The satisfaction or utility derived from cold in this regard diminishes as the consumption of water from a certain point increases.
The law of diminishing marginal utility can be demonstrated with the aid of a table or schedule.
Table or schedule demonstrating the law of diminishing marginal utility.
|No. of cups of cold water consumed||Total utility||Average utility||Marginal utility|
|1 2 3 4 5 6 7||9 16 24 30 34 36 36||9 8 8 7.5 6.8 6 5.1||– 9 8 6 4 2 0|
CRITICISM OF THE LAW OF DIMINISHING MARGINAL UTILITY
The law of diminishing marginal utility has been largely criticised on the basis of its assumptions,
of the assumptions are not realistic.
- The assumption that all commodities are divisible into small units is unrealistic. Houses, cars, etc are in large forms and cannot be divided into small units. So their supply cannot be in small units but in whole units.
- Due to the influence of habit and impulse, people do not always weigh the marginal utility of commodities before purchasing them. So, the assumption that people must weigh the marginal utility to be derived from any commodity before purchasing it is not true.
- The law of diminishing marginal utility does not start operating as soon as consumption is increased. Before the point of origin is reached, the marginal utility has increased.
- It is not always true that marginal utility decreases with increased consumption of a commodity. Certain commodities, when consumed, will lead to a corresponding increase in their demand, e.g. money, precious stones and jewellery.
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