Q 3. Explain the law of Diminishing Marginal Utility

Statement OF THE LAW :

ALFRED MARSHALL has stated the law as follows :

" the additional benefit which a person derives from a given increase in his stock of a thing diminishes with every increase in the stock that he already has''

· ASSUMPTIONS OF THE LAW :

1) CARDINAL MEASUREMENT :

It is possible to measure utility cardinally or numerically.

2) HOMOGENEITY :

All the successive units consumed should be homogeneous in character like quality, size, taste, colour, etc.

3) CONTINUITY IN CONSUMPTION :

There should be continuity in the process of consumption; i.e. the units should be consumed successfully one after another without any interval of time.

4) REASONABLE SIZE OF UNITS :

The units consumed should be of a reasonable size. For eg: we consider a glass of milk, a cup of tea, etc.

5) CONSTANCY :

The income of the consumer, his tastes, habits and preferences as well as the price of the commodity remain constant.

6) RATIONALALITY :

The consumer is a rational man with a normal behavior aiming at experiencing maximum satisfaction.

· ILLUSTRATION OF THE LAW :

The law can be illustrated using :

· UTILITY SCHEDULE

· UTILITY GRAPH.

UTILITY SCHEDULE :

UNITS OF COMMODITY CONSUMED

TOTAL UTILITY

MARGINAL UTILITY

1

30

30

2

52

22

3

67

15

4

76

9

5

80

4

6

80

0

7

77

-3

From the schedule, it is clear that as the units of the commodity consumed increase, the marginal utility derived from each additional unit consumed decreases.

Gradually, the marginal utility diminishes to zero and finally becomes negative.

At the point where marginal utility becomes zero, the total utility becomes maximum, indicating complete satisfaction.

If any unit is consumed after this point, the marginal utility becomes negative and the total utility also declines. This indicates disutility or dissatisfaction as a result of excessive consumption of a particular commodity.

· UTILITY GRAPH

FIG 1.2

OX axis = units of commodity consumed.

OY axis = marginal utility

Curve MU = marginal utility curve.

The marginal utility curve indicates the additional utility derived from consuming each successive unit.

Hence, it slopes downwards from left to right, indicating diminishing utility.

At the sixth unit, it coincides with the ‘x' axis indicating zero marginal utility.

At the consumption of the seventh unit, the curve slopes further down, indicating negative utility that suggests disutility or dissatisfaction.

· EXCEPTIONS TO THE LAW :

If the assumptions to the law are full realized, the law is universally applicable.

However, these are certain exceptions to the law.

In these cases, the marginal utility increases with every additional increase in the stock of the commodity consumed.

1) Hobbies :

Certain hobbies like stamp collection, collection of antiques, etc. tend to be an exception to the law. However, it is not a genuine exception as the condition of homogeneity is violated.

2) Drunkards :

The law is not applicable to drunkards as the utility increases with every increase in the dose of liquor.

However, it is not a genuine exception as the assumption of rationality is violated.

3) Misers :

A miser's greed increases with every increase in the acquisition of money. Hence the marginal utility of money increases with every increase in the stock of money.

However, when a miser spends money, his utility diminishes more rapidly than others.

So it is not a true exception.

4) Music and Poetry :

In case of music and poetry, a repeat hearing gives a better satisfaction. Hence the law is not applicable.

However, after a certain point of time, the same music and poetry becomes monotonous and yields disutility and so the law is applicable. So, it is not a genuine exception.

5) Reading

More reading gives more knowledge. So every additional book gives more utility.

However, it is not a genuine exception as the condition of homogeneity is violated.

CONCLUSION

· Hence there are no true exceptions to the law.

It holds good universally if the assumptions are fulfilled.

Infact, the law of diminishing marginal utility forms the basis for the law of demand.