Law of Diminishing Marginal Utility free essay sample

The law of diminishing marginal utility describes a familiar and fundamental tendency of humanbehavior. The law of diminishing marginal utility states that: â€Å"As a consumer consumes more and more units of a specific commodity, the utility from the successiveunits goes on diminishing†. Mr. H. Gossen, a German economist, was first to explain this law in 1854. Alfred Marshal later onrestated this law in the following words: â€Å"The additional benefit which a person derives from an increase of his stock of a thing diminishes withevery increase in the stock that already has†. The law of diminishing marginal utility is based upon three facts. First, total wants of a man are unlimitedbut each single want can be satisfied. As a man gets more and more units of a commodity, the desire ofhis for that good goes on falling. A point is reached when the consumer no longer wants any more units ofthat good. * Secondly, different goods are not perfect substitutes for each other in the satisfaction ofvarious particular wants. We will write a custom essay sample on Law of Diminishing Marginal Utility or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page As such the marginal utility will decline as the consumer gets additional units ofa specific good. Thirdly, the marginal utility of money is constant given the consumer’s wealth. The basis of this law is a fundamental feature of wants. It states that when people go to the market for thepurchase of commodities, they do not attach equal importance to all the commodities which they buy. Incase of some of commodities, they are willing to pay more and in some less. There are two main reasons for this difference in demand. (1) the linking of the consumer for the commodity and (2) the quantity of thecommodity which the consumer has with himself. The more one has of a thing, the less he wants theadditional units of it. In other words, the marginal utility of a commodity diminishing as the consumer getslarger quantities of it. This, in brief, is the axiom of law of diminishing marginal utility. This law can be explained by taking a very simple example. Suppose, a man is very thirsty. He goes tothe market and buys one glass of sweet water. The glass of water gives him immense pleasure or we say Handouts by: Sachin Pourush * 2. the first glass of water has great utility for him. If he takes second glass of water after that, the utility willbe less than that of the first one. It is because the edge of his thirst has been blunted to a great extent. Ifhe drinks third glass of water, the utility of the third glass will be less than that of second and so on. The utility goes on diminishing with the consumption of every successive glass water till it drops down tozero. This is the point of satiety. It is the position of consumer’s equilibrium or maximum satisfaction. If theconsumer is forced further to take a glass of water, it leads to disutility causing total utility to decline. Themarginal utility will become negative. A rational consumer will stop taking water at the point at whichmarginal utility becomes negative even if the good is free. In short, the more we have of a thing, ceterisparibus, the less we want still more of that, or to be more precise. â€Å"In given span of time, the more of a specific product a consumer obtains, the less anxious he is to getmore units of that product† or we can say that as more units of a good are consumed, additional units willprovide less additional satisfaction than previous units. The following table and graph will make the law ofdiminishing marginal utility more clear. Units Total Utility Marginal Utility1st glass 20 202nd glass 32 123rd glass 40 84th glass 42 25th glass 42 06th glass 39 -3From the above table, it is clear that in a given span of time, the first glass of water to a thirsty man gives20 units of utility. When he takes second glass of water, the marginal utility goes on down to 12 units;When he consumes fifth glass of water, the marginal utility drops down to zero and if the consumption ofwater is forced further from this point, the utility changes into disutility (-3). Here it may be noted that the utility of then successive units consumed diminishes not because they arenot of inferior in quality than that of others. We assume that all the units of a commodity consumed areexactly alike. The utility of the successive units falls simply because they happen to be consumedafterwards.The law of diminishing marginal utility can also be represented by a diagram. Handouts by: Sachin Pourush 3. In the figure (2. 2), along OX we measure units of a commodity consumed and along OY is hown themarginal utility derived from them. The marginal utility of the first glass of water is called initial utility. It isequal to 20 units. These assumptions are asunder:(i) Rationality: In the cardinal utility analysis, it is assumed that the consumer is rational. He aims atmaximization of utility subject to availability of his income. (ii) Constant marginal utility of money: It is assumed in the theory that the marginal utility of moneybased for purchasing goods remains constant. If the marginal utility of money changes with the increaseor decrease in income, it then cannot yield correct measurement of the marginal utility of the good.