THE LAW OF DIMINISHING MARGINAL UTILITY

THE LAW OF DIMINISHING MARGINAL UTILITY

The law of diminishing marginal utility states than as a consumer consumes successive units commodity, a point is eventually reached where consumption of an additional unit yields less satisfaction.

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 nothings 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 a 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 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 consumedTotal utilityAverage utilityMarginal utility
1 2 3 4 5 6 79 16 24 30 34 36 369 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, 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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