Law Of Diminishing Marginal Utility And Its Importance And

Significance

CONCEPT OF UTILITY

• Utility is the power or capacity of a commodity to satisfy human wants.

• Utility is measured in terms of utils.• For example: A person is prepared

to pay Rs 3 for an orange, it means he gets utility from it worth Rs 3.

CONCEPT OF MARGINAL UTILITY AND TOTAL UTILITY

• Marginal utility is the additional utility derived from consumption of an additional marginal unit of a commodity.

• Total utility is the sum of all the utilities derived from consumption of a certain number of units of a particular commodity.

LAW OF DIMINISHING MARGINAL UTILITY

• This law is also known as Gossen’s first law.• Marshall says, " The additional benefit

which a person derives from an increase of his stock of a thing diminishes with every increase in stock that he already has."

• In other words, the utility derived by the consumption of a good or service diminishes as we consume more and more of it. It reaches even zero and can become negative also.

Example of Law of diminishing Marginal utility

1st Ice Cream = Delighted

2nd Ice Cream = Very Happy

3rd Ice Cream = Happy

4th Ice Cream = Still Happy

5th Ice Cream = Not So Happy

6th Ice Cream = Unhappy

7th Ice Cream = Sick

SCHEDULE

Ice cream consumed Total utility Marginal utility

1 10 10

2 18 8

3 23 5

4 25 2

5 26 1

6 26 0

7 23 -3

GRAPH

1 2 3 4 5 6 7

-4

-2

0

2

4

6

8

10

12

Utility consumed

Mar

gin

al u

tiit

yInitial util-ity

Zero MU

Negative MU

Diminishing MU curve

ASSUMPTIONS OF LAW

• Only standard units of commodity are consumed.

• There is no time gap between the consumption of units.

• Tastes, preferences and fashion remain unchanged.

• No change in price.

IMPORTANCE /SIGNIFICANCE

• As law of diminishing marginal utility applies to money too, this forms the basis of the theory and practice of taxation. The utility of money to the rich is less than to the poor.

• This law also explains the familiar "diamond-water paradox". Diamonds command high price because of their high marginal utility, which is due to scarcity. Water, on the other hand, is in abundant supply so that its marginal utility is low and hence it has low price. Thus, the law of diminishing marginal utility explains why diamonds are high-priced as compared with water, even though the latter is indispensable for life

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