Law of diminishing marginal utility
When we feel hungry, we eat food, let’s say apples. The first Apple that we eat generally provides most satisfaction then the second. The second Apple provides more satisfaction than the third and so on. This means that the satisfaction that the utility we derive from consumption of every subsequent Apple is less than the consumption of the previous Apple. Marginal utility is the additional utility derived from consumption of each successive unit of commodity. In simple terms, the Law of diminishing marginal utility provides in simple terms provides that as we consume more and more units, of any commodity ( apples in this case), the utility derived from each successive unit (successive apples in this case) keeps of decreasing.
Law of diminishing marginal utility was first given by a German economist H.H. Gossen, and is therefore also known as “Gossen’s First law of Consumption”. This law of diminishing marginal utility has universal applicability , i.e it applies to all goods and services.
Assumptions of Law of Diminishing Marginal Utility : –
Like any other law, the applicability of Law of Diminishing Marginal Utility is based on certain assumptions. The following are the assumptions, which should exist if the law of diminishing marginal utility has to apply : –
- Cardinal measurement of utility : – Utility is measurable in quantitative terms and a consumer can express his satisfaction it’s such terms.
- Monetary measurement of utility :- Utility is measurable in terms of money.
- Consumption of reasonable quantity : – While measuring utility, the quantity which is considered in successive consumption should be a reasonable quantity of the commodity . For example, to measure the utility of apples, we should compare consumption of units of apples, and not slices of apples. If the unit of consumption is slices of apples, it is likely that a hungry person May get higher satisfaction from each successive consumption of next slice of Apple.
- Continuous Consumption:- Consumption should be a continuous process at any particular point in time. For example, if one Apple is consumed in the morning and another Apple is consumed in the evening afternoon, then the second Apple may provide equal or higher satisfaction as when compared to the Apple that was eaten in the morning.
- No change in Quality : – Law of DMU assumes that the quality of each successive unit of the the commodity which is consumed , is uniform. If a person eats a sour Apple first and the sweet apple thereafter, the Apple eaten later would give more satisfaction then the first apple.
- Rational consumer:- it is assumed that the consumer , aims at maximizing total satisfaction. For this purpose the consumer not only calculates the utility derived from each commodity, he also compares the utilities of different commodities.
- Independent Utilities : – Law of DMU assumes that marginal utility of one commodity has no relation with marginal utility of another commodity. Each of the commodities have independent utilities.
- Marginal utility of money is assumed to remains constant under the Law of Diminishing Marginal Utility
- Fixed income and prices : – Law of Diminishing Marginal Utility assumes that income of the consumer and prices of the goods which such consumer wishes to purchase , remains constant.
- Perfect knowledge : – The consumer is assumed to know , both the different goods on which his income can be spent, and the utility that may arise out of such consumption.