Question

Elucidate the law of diminishing marginal utility with diagram.

Answer 1

H.H. Gosen, an Austrian Economist first formulated this law in 1854. Hence Jevons called this law “Gossen’s first law of consumption”. Marshall perfected this law on the basis of cardinal analysis and it is based on the characteristics of human wants, its wants are satiable.

Definition:
Marshall states that “The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has”

• Assumptions:

1. The utility can be measured cardinally.
2. The marginal utility of money remains constant.
3. The consumer is a rational economic man.
4. The units of the commodity consumed must be reasonable in size.
5. The commodity consumed should be homogenous in all aspects.
6. Consumption takes place continuously at a given period of time.
7. No change in the taste, habits, preferences, fashions, income, and character of the consumer during the process of consumption.

• Explanation:
  The law states that if a consumer continues to consume more or more units of the same commodity, its marginal utility diminishes.
• Illustration:
  This law can be explained with a simple illustration. Suppose a consumer wants to consume apples one after another the utility from the first apple is 20. But the utility from the second apple will be less than the first (say 15), the third less than the second (say 10), and so on. Finally, the utility from the fifth apple becomes zero.

The utilities from the sixth and seventh apples are negative. This tendency is called “The . law of diminishing marginal utility’”.

Units of Apple	Total Utility	Marginal Utility
1	20	20
2	35	15 (35-20)
3	45	10 (45-35)
4	50	5 (50-45)
5	50	0 (50-50)
6	45	-5 (45-50)
7	35	-10(35-45)

From the above table and diagram. We find that the total utility goes on increasing but at a diminishing rate. Whereas marginal utility goes on diminishing. When marginal utility becomes zero, the total utility is maximum, when marginal utility becomes negative, the total utility diminishes.

• Criticisms:

1. As utility is subjective, it cannot be measured numerically.
2. This law is based on unrealistic assumptions.
3. This law is not applicable to indivisible commodities.