LAW OF DIMINISHING MARGINAL UTILITY

 Learning Contents:                                                                                                            

• Introduction to Law of Diminishing Marginal utility/ Gossen’s First Law of Consumption.
•  Assumptions of Law of Diminishing Marginal Utility.
• The simple experiment of understanding LDMU

Introduction

H.H.Gossen, a german economist was the first who found this law in Economics in 1854. Therefore, Jevons called this law “Gossen’s First Law of Consumption”. But credit goes to Marshall because he perfected this law on the basis of cardinal analysis. This law is based on the characteristics of human wants, i.e., wants are satiable or might get full or satisfied.

The law of diminishing marginal utility says that as more and more units of a commodity are consumed, the satisfaction received from the consumption of every additional commodity will decline. In simple words, we say if we have more of a thing, then we will receive less and less satisfaction from the consumption of every additional unit of it. It happens in respect of all goods and services.

For example, an individual might buy a certain type of biscuits or cookies for a while. Soon, they may buy less and choose another type of cookies because the satisfaction he was initially getting from those cookies started diminishing. Economics, the law of diminishing marginal utility  states that the marginal utility  of good or service declines as its available supply increases.

Assumptions of Law of Diminishing Marginal Utility

Cardinal Measurement of Utility

The first assumption is that utility is measured in terms of cardinal numbers say 1,2,3,4 and so on.

Consumption of reasonable quantity

This law will only work suitably when consumers consume standard units of the commodity like a glass of water, a cup of tea, etc. For e.g. If a thirsty person is given a spoon of water, then every additional spoon of water will give him more utility as drinking water from a spoon doesn’t indicate a reasonable quantity so in that case, this law will not hold true.

Consumer is rational

The consumer is rational which means that his decisions are more thoughtful and planned. A consumer can compare the utility of different goods and services to maximize satisfaction. His aim is to maximize satisfaction with minimum expenditure.

Continuous consumption

Consumption of the commodity should be continuous. It should not be like that one unit of the commodity is consumed today and another unit is tomorrow. For example, if one ice-cream is consumed in the morning and another in the evening, then the second ice-cream may provide equal or higher satisfaction as compared to the first one.

No change in Quality

The commodity consumed is assumed to be homogeneous or uniform in nature like weight, quality, taste, color, etc. For e.g. A second glass of shake with nuts and toppings may give more satisfaction than the first one if the first shake was without nuts or toppings.

The marginal utility of Money is Constant

It is assumed that the marginal utility of money is constant means that the utility per unit of money remains unchanged for the consumer. This implies that each additional unit of money provides the consumer with the same level of satisfaction. It will act as a standard reference for buying any good for the consumer. For example, if spending a rupee on a particular good gives the consumer satisfaction of 10 utils. So, 10 utils will be taken as the marginal utility of money.

Fixed income and prices:

Price of the goods and services and income of the consumer remain constant.

No change in taste and preferences

 There should be no change in the taste, habits, preferences, fashion, and character of the consumer during the process of consumption.

 Example of Diminishing Marginal utility

 Understanding Diminishing Marginal Utility

 Let’s do an experiment to understand the concept of diminishing marginal utility.

Step 01: Get some of your favorite sweets like chocolate, pastries, or cookies, etc.

Step 02: Take a bite and evaluate, on a scale from 0 to 10 (with 0 being the disutility (dissatisfaction) and 10 being the greatest utility (satisfaction), the level of utility from that bite. Record the marginal utility of that bite (i.e., how much you get from that one additional bite).

Step 03: Repeat step 02. It is important to be consistent with the consumption of each unit every time i.e., the same size and no drinking milk or water partway through. After consuming the same unit of good you will notice that the additional satisfaction is decreasing.  When you run out of chocolate or your marginal utility goes to zero you can stop further consuming it.

Let’s try some questions

Choose the correct answer

1. The Law of Diminishing marginal utility will be applicable. If the good in use is:

a. inferior

b. superior

c. same

d. Giffen

2. When satisfaction gained drops as the number of units possessed increases,

a. Law of demand

b. Law of Diminishing marginal utility

c. Law of Equi- Marginal Utility

d. Production Possibility Frontier

3. As you consume more and more ice cream, which of the following is true about the marginal utility of the ice cream and total utility you get from the ice cream?

a. Marginal utility drops; Total utility drops

b. Marginal utility drops; Total utility rises

c. Marginal utility rises; Total utility drops

d. Marginal utility rises; Total utility rises

Answer Key

1. c  2. b 3. b

Thanks & please Share with your friends  

Comment if you have any questions.