The Law of Diminishing Marginal Utility DMU is a core concept in the cardinal approach to consumer behavior analysis. This blog delves into how this law explains the decreasing satisfaction consumers experience with each additional unit of a good, shedding light on consumer choices and the limits of consumption. Discover how understanding marginal utility can provide valuable insights into purchasing decisions and economic behavior. This topic is equally important for the students of economics across all the major Boards and Universities such as FBISE, BISERWP, BISELHR, MU, DU, PU, NCERT, CBSE & others & across all the business & finance disciplines.
Table of Contents
The Law of Diminishing Marginal Utility DMU
Introduction & Importance
The law of diminishing marginal utility is also called Gossen’s first law of consumption because this law is presented by HH Gossen in 1854. According to The Law of Diminishing Marginal Utility DMU, additional utility or marginal utility decreases with the use of additional unit of consumption till the point of saturation and beyond the pointof saturation the marginal utility turns negative.
The Law of Diminishing Marginal Utility DMU is a fundamental law to understand human behavior and important for decision making in business. It also helps to understand theory of value that how increase in supply of money can decrease its value. This law provides bases for the law of demand, supply, elasticity and consumer’s surplus. The Law of Diminishing Marginal Utility DMU also helps to understand and form the tax system that money has greater utility for rich and low utility for poor.
Definition
“Other things remaining the same, continuous use of units of commodity give less and lass satisfaction, till it reaches to zero and then becomes negative” or
“As we consume more of an item. the amount of satisfaction produced by each additional unit of that good declines”
Key Points of the Law
- Total utility T.U is the sum of utility gain of particular good.
- Total Utility T.U increases at decreasing rate.
- Utility attain from the use of additional unit of consumption or the change of total utility is called marginal utility M.U.
- Marginal utility M.U decreases with additional unit of consumption that is why it is called diminishing marginal utility
- Point of satiety is the point at winch total utility T.U is maximum and marginal utility M.U is zero.
Assumptions
1. Rational Behavior:
Consumers are rational and aim to maximize their total utility.
2. Cardinal Measurement of Utility:
It is assumed that utility can be measured and quantified.
3. Homogeneity of Units:
Each unit of the good or service consumed which we select to test this law must be identical in all respects.
4. Ceteris Paribus:
All other factors remain constant (income, tastes, prices of other goods. etc.)
5. Utility is Additive:
The total utility is the sum of utilities of individual units consumed.
6. Suitable Quantity:
While observing this law, the quantity of good must be suitable for example, it will not be suitable that we take one glass of water and after that we take sips of water and count them as we are taking glass of water.
7. Consumption must be continuous:
While observing The Law of Diminishing Marginal Utility DMU, consumption of product must be continuous for example if we take one glass today and take second glass of water tomorrow then this law will not work.
8. Quality must be same:
While observing this law, quality of the product must be same or Identical for example, if you take first cup of simple ice-cream and in second cup you take extra topping of nuts and dry fruits then your marginal utility may not fall.
9. Utility must be independent:
While observing the law of diminishing marginal utility, the marginal utility of one unit must be independent to the utility of other unit
10. Mental Condition:
Mental condition of a consumer must be stable while application of the law and he should be a sane person because mentally ill or insane person can consume more one unit after another.
11. Income must be Constant:
The Law of Diminishing Marginal Utility DMU will be applicable only if the income of the consumer must be constant because it is observed normally that when income increases, people consume more.
Tabulated and Diagrammatical Presentation of the Law
| Consumption of Ice-Cream | Utils | Total Utility T.U | Marginal Utility M.U |
| 1 | 40 | 40 | 40 |
| 2 | 30 | 70 | 30 |
| 3 | 20 | 90 | 20 |
| 4 | 10 | 100 | 10 |
| 5 | 0 | 100 | 0 Point of Satiety |
| 6 | -10 | 90 | -10 |
| 7 | -20 | 70 | -20 |
Explanation
At the consumption of 1st unit of ice-cream, consumer gets 40 utils. Here total utility and marginal utility is also 40. When consumer consumes second unit of ice-cream, he gains 30 utils, here his total utility become 70 and marginal utility which is change of total utility is 30. Similarly, his total utility increases with decreasing rate and his marginal utility is decreasing which is shown in the diagram. When consumer consumes 5th unit of ice-cream, his total reaches at the maximum point of 100 and marginal utility becomes 0 and that is the point of satiety or saturation. Beyond this point, consumer gets negative marginal utility and his total utility also declines which is shown in the table and diagram above. Above table and diagram proves that when consumer consumes more and more unit of good, his or her total utility first increases with decreasing rate and beyond the saturation point, his or her total utility declines. On the other hand, marginal utility declines from the start, approaches to zero and then turns negative which is shown through downward slopping curve in above diagram.
Limitations/Exceptions/Criticism
Assumes Rationality
It is assumed in the law that human must be rational but in reality sometimes the rationality of the human is not possible in love, affection, habits and social influences.
Measurement
It is also assumed that utility can be assumed and measured under cardinal approach but in reality, utility cannot be measured.
Income and Wealth
In reality, income and wealth has no diminishing marginal utility. Their utility increases as income or wealth increases with increasing rate so that their marginal utility also increases.
Knowledge
The Law of Diminishing Marginal Utility DMU does not hold true in case of knowledge. As we know that when knowledge increases, its utility also increases so that its marginal utility also increases.
Constant Conditions (Ceteris Paribus)
It is also assumed in the The Law of Diminishing Marginal Utility DMU that other factors e.g., income, taste, preferences remain constant but in reality it is not possible. Slight change in other factors can put huge impact on the consumer behavior.
Non-Economic Factors
The Law of Diminishing Marginal Utility DMU only holds true in economic factors but it does not hold true in no-economic factors such as culture and psychological influences etc.
Hobbies& Fashion
The Law of Diminishing Marginal Utility DMU does not hold true in hobbies and fashion. Stamp or coin collector wants more and more antique stamps and coins on the other hand fashion seeker person does not care about utility and wants to buy more of new fashion products.
Drugs/Tranquilizers
The person who is addicted to drugs or some sort of tranquilizer wants more and more so he or she cannot be analyzed under the The Law of Diminishing Marginal Utility DMU.
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