Law of Diminishing Marginal Utility

A consumer’s demand for a commodity is typically determined by the amount of utility (or satisfaction) he derives from the commodity in question. The ability of a commodity to satisfy a consumer’s desire is referred to as its utility. Generally speaking, the greater the demand for a commodity or the greater the desire to possess it, the greater the utility derived from the commodity. The concept of utility is a matter of personal preference. Individuals can derive varying levels of utility from the same commodity depending on their circumstances. For example, someone who enjoys chocolate will derive significantly greater utility from a chocolate than someone who is not particularly fond of chocolate.

What is Marginal Utility?

The change in total utility caused by the consumption of one additional unit of a commodity is referred to as marginal utility (MU). Take, for example, the following scenario: 4 bananas provide 28 units of total utility, while 5 bananas provide 30 units of total utility Clearly, the consumption of the fifth banana has resulted in an increase in total utility of two units (30 units minus 28 units). As a result, the marginal utility of the fifth banana is equal to two units.

Law of Diminishing Marginal Utility

Alfred Marshall provides a thorough explanation of the law of declining marginal value. According to the law of diminishing marginal utility –

Every succeeding unit of a commodity provides utility at a falling rate during the course of consumption, assuming that all other factors remain constant; yet, the total utility grows over the course of consumption.

Thus, the marginal utility may decline into negative utility, because it may become completely undesirable to consume another unit of any product.. This means that the most value is often found in the initial unit of consumption of a product, with subsequent units of consumption containing decreasingly less value. Consumers use the rule of diminishing marginal utility to their advantage by purchasing a wide variety of products.

Law of Diminishing Marginal Utility – Analogy 

An analogy is the best way to understand the Law of Diminishing Marginal Utility. Let’s look at an illustration like this –

Ray is extremely determined to visit a restaurant that serves a buffet. He piles food onto his plate and begins to consume it. The amount of enjoyment that Ray derives from a plate of food is directly related to the degree of hunger that Ray is experiencing. Consequently, Ray will have greater satisfaction (utility) from the first plate of food than from the second dish of food, which in turn will experience greater satisfaction (utility) from the third plate of food.

Ray’s hunger level decreases with each dish of food, resulting in the condition described above. Reduced hunger levels result in less enjoyment from the food on the plate as a result of the drop in hunger levels. Each dish of food fills Ray up, reducing the amount of satisfaction he will derive from the plates of food that come afterwards.

Law of Diminishing Marginal Utility – Assumptions 

It is necessary to make certain assumptions in order for the law of diminishing marginal utility to hold true. Each premise stands on its own logic and makes sense on its own. It is untenable for the law of diminishing marginal utility to hold true if any of the assumptions are not true.

In the law of diminishing marginal utility, the following are the assumptions that must be made –

• A consistent level of quality should be maintained between successive units of goods. Whether the quality of the goods improves or deteriorates, the law of diminishing marginal utility may or may not be demonstrated to be true.
• The consumption of goods should be on an ongoing basis. It is possible that the concept of diminishing marginal utility will be altered if there is a significant pause in the consumption of goods.
• The mental outlook of the consumer should not change.
• The number of units of goods should not be too few or too small. In this case, it is possible that the utility will not be measured accurately.

Law of Diminishing Marginal Utility – Limitations 

• Unrealistic assumptions: Include the conditions of uniformity, consistency, and stability. It is unlikely to find all of these assumptions at once.
• Inapplicable in certain goods: It implies that the law of diminishing marginal utility cannot be applied to products, such as televisions and refrigerators. To put it another way, the consumption of these commodities isn’t constant.
• Consistent marginal utility of money: It is erroneous to assume that the marginal utility of money will remain constant over time. In addition, the marginal usefulness of money is decreasing over time.

Conclusion 

By definition, the marginal utility of products decreases with consumption. But there is an exception. It is noted that as a person consumes more of a good, their utility increases. Like pastimes. It means that hobbies like stamp and coin collecting defy the law of declining marginal utility. This is because a hobby item’s utility increases with time. For example, receiving a new set of stamps or coins boosts satisfaction. The utility decreases if the same stamps or coins are gained again.