Law of Diminishing Marginal Utility
Introduction The law of diminishing Marginal utility was initially formulated by a German economist H.H. Gossen. It was later systematically formulated by Alfred Marshall. The law of diminishing marginal utility states that as more and more units of a commodity are consumed, marginal utility derived from each additional unit keeps on decreasing. The law of diminishing marginal utility can be explained with help of total utility (TU) and marginal utility (MU) curves and schedules. The assumptions on which the law of diminishing marginal utility is formulated are as follows: consumer acts rationally, there is cardinal measurement of utility, there is homogeneity of units, there is constancy of marginal utility of money, there is continuity in consumption, there is no change in fashion, habits and taste of consumer, there is no change in income and prices, etc. Given these assumptions the law of diminishing marginal utility holds universally. The exceptions to the law of diminishing marginal utility are: hobbies, misers, music and poetry and money The few important limitations and criticisms of the Law are: Utility is a psychological concept and cannot be measured. Marginal utility of money cannot be constant Most of the assumptions on which the law is formed are unrealistic, etc.
Total Utility starts diminishing whenMarks:1
MU is negative.
Initially when the consumer starts consumption TU and MU both increases. After the level of full satisfaction MU starts falling and becomes negative. At this time TU also starts falling or TU is decreasing.
Law of diminishing marginal utility statesMarks:1
Less satisfaction with every increasing unit.
Explanation:Law of diminishing marginal utility states that Utility decreases with every additional unit of the commodity consumed. As more of a commodity is consumed intensity to use it goes on declining.
According to the law of diminishing marginal utility, marginal utility isMarks:1
maximum at the first unit.
Explanation:The extra satisfaction from consuming a unit will normally fall as more units are consumed. Thus, marginal utility is maximum at the first unit and goes on decreasing with increase in consumption.
The law of DMU states that with every increase in consumption of successive units, the utilityMarks:1
goes on decreasing.
Explanation:The law of Diminishing Marginal Utility states that with every increase in consumption of successive units, the utlity derived goes on decreasing. Thus, additional or marginal utility declines and the TU increases at a diminishing rate.
What do you understand by the term “Rationality “ in economics?Marks:2
Rationality refers to the tendency of an individual to promote his self-interest. A consumer is rational in his behavior if he attempts to maximize his satisfaction while he is spending money on the purchase of different goods and services. Likewise a producer is rational, if he attempts to maximize his profits.