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January 02, 2018

Law of Diminishing Marginal Utility

January 02, 2018


The quality of a good or service to satisfy human want is called utility. It has no physical existence. It is concerned with the consumer mind and is a relative concept. Utility cannot be measured as weight or height. It is merely estimated for expressing satisfaction. Utility differs from person to person. For example, pizza satisfies person A want therefore pizza has utility for A but at the same time pizza has no utility for B because B does not like eating pizza.

Utility has the following kinds.

Marginal utility: It is derived from the additional unit of consumption.

Total utility: It is sum of marginal utilities.

Average utility: It is division of total utility by consumption of total units.  


Law of Diminishing Marginal Utility


The law of diminishing marginal utility states the additional utility of a commodity decreases as its consumption increases, while other things remain the same.  It means every additional unit that is consumed has a lower marginal utility than the unit before consumed. At a certain point the marginal utility can even become negative. The explanation of the law is given below.

Explanation
Suppose, you are very thirsty. You go the market and buy one bottle of water. The first glass of water will be a great satisfaction for you. The second glass of water will give you less satisfaction than the first one, and the third one less than the second one and so on. If you are not ready to drink fifth glass of water, and you drink, thus the utility of the fifth glass will be zero. It is the position of maximum satisfaction. If you take sixth glass of water, the marginal utility will become negative.  The law of diminishing marginal utility can be further illustrated with the help of schedule and diagram.

Schedule of law of diminishing marginal utility
   
We can see from the above schedule that marginal utility keeps on diminishing with every additional glass of water. The consumer gets 12 units of utility from first glass of water. When he drinks second glass of water, his marginal utility goes down to 9 units, and it continuously diminishing by taking further glass of water. This process showing the law of diminishing marginal utility.


Diagram of law of diminishing marginal utility


In the above diagram, units of utility are measured on y-axis and units of commodity are measured on x-axis. MU is the marginal utility curve. The marginal utility of fifth consumption of a commodity (glass of water) is zero which is satiety point. While the marginal utility of sixth glass of water is negative which is (-3). We can see that MU curve is sloping downward at the consumption of every glass of water. The downward slop of the MU curve is representing the law of diminishing marginal utility.



Law of demand 


Exceptions or Limitations


There are some factors on which the law of diminishing marginal utility does not apply. They include:
  • Desire for money: The law is not applicable to money because generally when a person gets more money he gets more satisfaction and pleasure. So, the marginal utility of money does not become zero.
  • Collection of rare goods: The law is not applicable in case of rare objects because when a person collects rare objects like paintings, old coins, postage stamps, jewels or diamonds, he gets more utility.    
  • Use of intoxicants: The law will not be effective in case of using intoxicants like alcohol, opium, or drug.

Assumptions or Conditions


Following are the assumptions of the law:
  • All units of a commodity must be same in quality and quantity.
  • 2. There should be continuity in consumption of the commodity. If the interval between units of consumption is too long, the law will not work.
  • 3. There should be no change in taste, habit, fashion, and income of the consumer.  
  • 4. Units of commodity must be of suitable size. For instance, giving water to a thirsty person by spoon will increase instead of diminishing utility of the subsequent spoon of water.   
  • 5. There should be no change in price of the good and its substitute. 
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