Question

Name the law which deals with the behaviour of marginal utility when the consumer consumes a commodity continuously at a given time. Explain this law with the help of a diagram.

Answer 1

The Law of Diminishing Marginal Utility states that with a continuous increase in consumption of a commodity, total utility increases at a diminishing rate, i.e., marginal utility declines.

Assumptions:

1. Utility is measured cardinally.
2. Every unit of the commodity is homogeneous.
3. The law of satiety holds.
4. Consumption is continuous.

Fig. 1. shows that the TU curve slopes positively till point M, indicating a rising TU with an increase in consumption up to Q and it reaches its maximum at point M. Beyond it, the TU curve slopes negatively, i.e., beyond the satiation point, TU decreases with further increases in consumption. TU curve is concave to the horizontal axis as TU increases at diminishing rate.

MU curve slopes negatively in Fig 2. It indicates that MU falls continuously with increase in consumption of the commodity. As consumers fail to derive any additional utility from the consumption of an additional unit of commodity at the point of saturation, MU becomes zero and the MU curve intersects the quantity axis for the OQ level of consumption. Beyond Q, MU becomes negative with further increases in consumption.