Law of Diminishing Marginal Utility

The law of diminishing marginal utility expresses the universal human experience. This law was at first pointed out by H. H. Gossen. So, this law is known as Gossen’s First Law. This law was developed by W. S. Jevons in England and by Karl Menger in Austria about the same time (1871) and modified by Alfred Marshall. This law states that if a person consumes more and more units of a commodity, its marginal utility declines. In other words, larger the stock possessed by a person, the smaller the utility he derives from an additional unit of the commodity.

According to Marshall, “The additional benefit which a person derives from a given increase of his stock of anything diminishes with the growth of the stock that he has.”

In the words of K. E. Boulding, “As a consumer increases the consumption of any one commodity, keeping constant the consumption of all other commodities, the marginal utility of the variable commodity must eventually decline.”
The law can be express in another way as well. As opined by Watson and Getz, “The more you have of anything, the less important to you is any one unit of it.” So, when a consumer gets more and more unit of a commodity he puts it to less and less urgent uses. We can illustrate it by the help of W. J. Baumol’s interesting example. If a man has a cake, he gives it to his child. If he has two cakes, he gives the second cake to his wife. If he has three cakes, he keeps the third one for himself and if he has four cakes, he gives the fourth one to his mother-in-law. This clearly indicates the declines in marginal utility of cake.

There are several reasons for the decrease in marginal utility. They are:
a) Physical and psychological: The consumption or possession of too many units of a commodity brings physical satisfaction. The response to a repeated stimulus diminishes.

b) Possibility of having everything: If a consumer could have everything he wants free of cost, he would choose those quantities of each good that would make the marginal utility of each one zero. This implies that he would maximize total utility for each goods. Marginal utility therefore, would have to diminish to get to zero.

c) Several uses of commodity: Each commodity may have several uses. Each consumer ranks the uses. If the consumer has one unit of a commodity, he puts it to most important use. If he has more units, he puts them to less and less important uses. Marginal utility diminishes, because of the successively less important uses of additional quantities of a commodity.

This law can be illustrated by the help of a table and diagram as shown below:
Marginal and Total Utility
Units of Orange
Marginal Utility
Total Utility
1
2
3
4
5
6
7
8
10
8
6
4
2
0
-2
-4
10
18
24
28
30
30
28
24

The table shows that as the consumer consumes more and more units of orange, the additional utility obtained from successive units goes on declining. It means that the marginal utility declines. As for example, marginal utility from first unit is equal to 10, from 2nd unit is 8, from 3rd unit is 6 and so on. Marginal utility at of 6th unit is zero. The zero marginal utility means that the consumer has all he want of the commodity. He does not want another unit. If he further consumes, marginal utility will be negative or the commodity will have dis-utility. Negative marginal utility means that the consumer has so many units of same thing. He would rather like to have fewer.
Diminishing Marginal Utility
In the figure, OX axis represents quantity (units) of orange and OY axis represents marginal utility. If we join points of marginal utility and quantity combination from point A to F, we get marginal utility curve MU. The MU curve slopes downwards to the right. This means that marginal utility goes on declining. The consumer gets marginal utility equal to 10 from 1st unit, 8 from 2nd unit, 6 from 3rd unit and so on. Marginal utility derived from 6th unit is zero and from 7th unit marginal utility is negative.

Exceptions/ Limitations or Assumptions of Law of Diminishing Marginal Utility

There are should exist certain conditions for the law of diminishing utility to hold. In the absence of these conditions, the law does not apply. The law does not apply in the following conditions.
  1. Similar units: The different units of a commodity should be similar or homogeneous. If the consumer is supplied with superior quality after consumption of first, his marginal utility will increase.
  2. Suitable units: The units of commodity consumed by a consumer should be suitable. It must not be too small. Hence, the units of the commodity must be relevantly defined. The law holds good for a pair of shoes, but not for a single shoe. Likewise, if a man is very thirsty and he gets only a glass of water, the 2nd glass of water will yield him more utility than the first. “In fact this law begins to operate only after certain point, called the ‘origin’ until the origin is reached-that is, until the minimum amount of commodity that can be used effectively has been used – successive increments will show decreasing utility.”
  3. Suitable period: There must not be time-gap in the consumption of different units. If a man takes ‘lunch’ in the morning and ‘dinner’ in the evening, his marginal utility will not diminish. Hence, the commodity must be consumed continuously.
  4. Change in taste: The law holds for individual commodity desired by an individual consumer with given tastes. But if the taste of the consumer changes during the process of consumption, and he likes the commodity more, then the marginal utility of any unit of that commodity increases.
  5. Rare collection: The law may not hold in case of rare collection. The persons with habit of collecting coins, stamps are never satisfied. But it does not mean that the law does not hold. Because, the man does not like to collect same type of article over and over again.
  6. Normal persons: The person should be normal for this law to hold good. The law does not apply to misers, drunkards and gamblers.
  7. Fashion, habit and income: The fashion, habit and income of the consumer must remain same. If a dress, out of fashion comes to the fashion, a nonsmoking man develops habit of smoking or a man unable to purchase motorbike is able to purchase, the marginal utility of the dress, cigarettes and motorbike increase respectively.
  8. Indivisible goods: According to the law, marginal utility diminishes when the commodity is bought in small units, such as orange, biscuit, milk and so on. Such commodities are said to be divisible. But the law is silent as to the commodities that are brought one at a time at long intervals. Such commodities are indivisible goods such as automobile, T.V. set, refrigerator etc. Likewise, the law is silent about the marginal utility of the commodities that are usually purchased once in a lifetime.
Despite the aforementioned exceptions, this law is regarded universal in its application and is a general law of life. There is hardly any situation under which this law does not apply. As for example, we don’t like to hear the same music, see the same movie over and over again. In fact, this law applies to everything.

Importance of Law of Diminishing Marginal Utility

The law of diminishing utility has both theoretical and practical importance as follows:
  1. Basis of other laws: Some of the laws of economics and laws of consumption are based on this law. As for example, the law of demand, law of maximum satisfaction, law of consumer’s surplus is based on this law.
  2. Theory of taxation: This law also serves as the basis of theory of taxation. The more tax is imposed on the rich while less tax is imposed on the poor. Because, the utility of money is less to the rich and more to the poor.
  3. Advocacy of equal distribution of income and wealth: People advocate equal distribution of income and wealth among the people of the country. Because the poor people get more utility from money whereas the rich people get less utility from money.
  4. Determination of market price: This law is also useful in determination of market price. The increase in stock of a commodity gives less utility. Hence the people can be induced to buy more only by lowering price. In other words, when supply increases, price falls.
  5. Regulates daily expenditure: This law regulates the daily expenditure of people. People do not spent all their money in same commodity. They spend part of their money in buying other commodities.