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Tutorial Topic: Law of diminishing marginal utility, definition, example, assumptions, exceptions, importance of law of diminishing marginal utility.
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What is Law of Diminishing Marginal Utility?
Definition: The law of diminishing marginal utility states that as the quantity consumed of a commodity continues to increase, the utility obtained from each successive unit goes on diminishing, assuming that the consumption of all other commodities remains the same.
To put simply, when an individual continues to consume more and more units of a commodity per unit of time, the utility that he/she obtains from each successive unit continues to diminish.
Law of diminishing marginal utility example
For example, the utility derived from the first glass of water is high, but with successive glasses of water, the utility would keep diminishing. The law of diminishing marginal utility is applicable to all kinds of goods such as consumer goods, durable goods, and non-durable goods. Let us understand the law of diminishing marginal utility with the help of an example.
Assumptions of law of diminishing marginal utility
Assumptions of law of diminishing marginal utility are as follows:
- Rationality: The law of marginal utility assumes that a consumer is a rational being who aims at maximising his/her utility at the given income level and the market price.
- Measurement of utility: The utility of a commodity can be measured using quantifiable standards like a cup of tea, a bag of sugar, a pair of socks, etc.
- Constant marginal utility of money: The marginal utility of consumer’s income is constant.
- Homogeneity of commodity: The successive units of a commodity consumed are homogenous or identical in shape, size, colour, taste, quality, etc.
- Continuity: The consumption of successive units of a commodity should be continuous without intervals.
- Ceteris paribus: Factors, such as the income, tastes and preferences of consumers; price of related goods; etc. remain unchanged.
Exceptions of law of diminishing marginal utility
Following are the exceptions of law of diminishing marginal utility:
- Drunkard – Utility from each additional peg of wine increases for the drunkard. The law does not operate in his case.
- Money – The law docs hold good in case of money. The utility of money does not diminish.
- Hobbies– Hobbies like stamp collection is an exception. A man who has hobby of collecting stamps feels more satisfied with every successive stamp he is able to collect.
- Rare collections
- Knowledge and Innovation
- Precious goods
- Utility increases due to a demonstration. It is a natural element.
Importance of law of diminishing marginal utility
- Basis for law of demand: The law of diminishing marginal utility is one of the fundamental laws of Economics. The basic law of demand is, in fact, totally based on the law of diminishing marginal utility.
- Basis of the Progressive Tax-policy: The government can formulate a progressive tax-policy on the basis of the law of diminishing marginal utilIty.
- Basis for Re-Distribution of Wealth Policy: The government’s public expenditure policy is also based on the law of diminishing marginal utility.
- Determining optimum level of consumption: This law helps in the determination of the optimum level of consumption. it is attained at a point where the marginal utility of a commodity equals its price.
- Forms basis for production of things: According to Taussing, only due to this very law, are the various things produced or manufactured.
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