Law of Diminishing Marginal Utility and It’s Assumptions

Meaning of Diminishing Marginal Utility

The human intensity of want for any commodity tends to decrease as more and more units of a commodity are consumed.  The Law of diminishing marginal utility states that as more and more units of a commodity are consumed, the marginal utility derived from every additional unit consumed must decline. It happens in respect of all goods and services.

It is therefore also known as the fundamental law of satisfaction or the fundamental psychological law.
As every successive unit of the good or service offers less and less satisfaction, it indicates that marginal utility tends to decline as consumption increases. This is called the law of diminishing marginal utility.

Example of Diminishing Marginal Utility

A consumer might buy a certain type of coffee for a while. Soon, they may buy less and choose another type of coffee or buy tea instead because the satisfaction they were initially getting from the chocolate is diminishing, as the consumer consumes it more and more.

Riya is extremely hungry and goes to a restaurant that offers a buffet. She fills her plate with food and starts eating. The amount of satisfaction Riya gains from a plate of food is directly proportional to Riya’s hunger level. Therefore, the first helping of food will give Riya more satisfaction (utility) than the second helping of food, which in turn will give Riya more satisfaction than the third helping of food.

This situation above occurs because each helping of food reduces Riya’s hunger level. The reduction in hunger levels results in less satisfaction from the helping of food being consumed.

Each plate of food fills Riya up and therefore lessens the amount of satisfaction she will get from the plates of food that follow. Mathematically, it can be represented by the following table:

Food ConsumedTotal Utility (say)Marginal Utility
1 Helping20
2 Helping288
3 Helping357
4 Helping416
5 Helping465
6 Helping504
7 Helping533
8 Helping552
9 Helping561
10 Helping560
11 Helping55-1
12 Helping53-2

Example of Law of Diminishing Marginal Utility

Observations

  • As more and more units (here helping) of the food are taken and consumed, the marginal utility derived from each successive unit tends to diminish. It may even subsequently become zero or negative.
  • As long as Marginal Utility is positive, Total Utility keeps increasing.
  • Total utility is maximum when marginal utility is zero
  • Total utility starts decreasing when Marginal utility is zero.

Assumptions of Law of Diminishing Marginal Utility

There are two basic assumptions of the law of diminishing marginal utility.

  • Only standard units of the commodity are consumed, that is a glass of water not a spoon of water, or a cup of coffee not a ladle of coffee.
  • Consumption of the commodity is continuous, not that one unit of a commodity is consumed now and the other tomorrow. If you take a bite of an apple today and the next bite tomorrow, the law of diminishing marginal utility won’t hold true.

Exceptions to Law of Diminishing Marginal Utility

The exceptions to the law of Diminishing Marginal Utility:

  • This law is valid only for uniform units of a commodity, which are the same in shape, size, length, etc.
  • This law applies only when the consumer doesn’t change his taste and the fashion of the commodity remains the same, which is hardly the case.
  • This law is not applicable for habitual goods of consumption like drugs, alcohol, etc.

Conclusion

  • The law of diminishing marginal utility says that the marginal utility from each additional unit declines as consumption of the commodity increases.
  • The marginal utility can decline into negative utility, as it can become entirely unfavourable to consume another unit of the commodity.
  • The law is based on the ordinal utility theory

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