The Law of Diminishing Marginal Utility Explanation, Limitation & Assumption

Mon, 09/19/2011 - 11:41 -- Umar Farooq

That property of a commodity which satisfies the wants of the consumers is called utility. Then it is want satisfying power of a commodity. It is subjective and ethically neutral concept.

The Law Of Diminishing Marginal Utility

The law has seen developed by Marshall, the founder of cardinal utility analysis. i will explain the law in the following words.

The law of diminishing marginal utility states that "additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase the stock he already has".  This law applicable only subject to conditions:

  1. That a particular point of time or period of time is being considered
  2. That the consumption of the commodity does not breed addiction
  3. That the size of the increment of the commodity chosen is not such that one unit is useless without increment. Utility from the last unit considered worth purchasing is called marginal utility. It is the utility of marginal unit. To an individual, marginal utility and price will be equivalent.

Graph and Curve of Marginal Utility

Cups of Tea

1

2

3

4

5

6

7

8

Total Utility

12

22

30

36

40

41

39

34

Marginal Utility

12

10

8

6

4

1

-2

-5

Explanation of Law

When one cup of tea is taken per day. The total utility will be 12 and due to its first cup the marginal utility will also 12.  With the consumption of two cups per day the total utility rises to 22 but marginal utility will fall to 10.  The consumption of tea increases six cups per day, from these additional cups he marginal utility will goes on diminish.  When 7 cups of tea consumed per day then instead of giving positive marginal utility the seventh cup will give negative marginal utility  -2, this is due to too many cups consumed per day may cause him gas trouble or acidity.  More than six cups of tea per day gives inutility rather than satisfaction.

Assumptions of Law of Diminishing Marginal Utility

The Classical and neo-classical theories of welfare based on cardinal utility.  The premises on which utility bases are below:

1. Cardinal Measurement of Utility

Utility is a measurable and quantifiable entity.  A person can express the utility or satisfaction derived from a good in quantitative term as 10 units, 15 units, 20 units.  It can be express in cardinal number.

2. Independent Utility

The second important tent of the cardinal utility analysis is the hypothesis of independent utility.  On this hypothesis the utility which a consumer derives from a good is the function of quantity of that good and of that good only.  It dose not depend at all upon the quantity consumed of others goods. The goods possess independent utilities and or addictive.

3. Marginal Utility of Money Remain Constant

Another important premises of Marshall’s marginal utility analysis is the constancy of marginal utility of money. According to it marginal utility of a commodity diminishes as more of it is purchased or consumed, the marginal utility of money with the purchases remains constant throughout.

The assumption of constant marginal utility of money is a crucial Marshallian utility analysis. When the price of a good falls and real income of a consumer rises, and the marginal utility of money will fall, but Marshall ignore this and assume that marginal utility of money did not change as a result of change  in price.

4. Introspection Method

Another important assumption of the cardinal analysis is the use of introspective method of judging the behaviour of a marginal utility.  The cardinalist school assumes that the behaviour of marginal utility in the mind of another person can be judged with the help of self observation. For Example, a person know that he purchase more and more a good the less utility he derived from the additional utility of it.  Applying this method a person can read other person mind and can say with confidence that marginal utility of a good will diminish as have more units of it.

Exception and Limitation of the Law

  1. Desire for money
  2. Knowledge art and innovations
  3. Precious and historical things
  4. Liquor and music or wine
  5. Hobbies and rare objects

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