Law of Diminishing Marginal Utility and Limitation of the Law of Diminishing Marginal Utility

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Explanation of the Law of Diminishing Marginal Utility

The law of diminishing marginal utility can be explained by a numerical table and geometrically with a diagram.

For this refer to table and figure which illustrate the relation of total utility (TU) and marginal utility (MU) and explain the law of diminishing marginal utility.

Because marginal utility is defined as the change in total utility resulting from one unit change in the quantity consumed.

It is recorded halfway between two units consumed instead of indicating it corresponding directly to each unit consumed.

 

Units of good X consumed per day	Total utility	Marginal utility
1	10
2	18	18 – 10 = 8
3	24	24 – 18 = 6
4	28	28 – 24 = 4
5	30	30 – 28 = 2
6	30	30 – 30 = 0
7	28	28 – 30 = – 2

 

Table shows that when our hypothetical consumer goes on consuming goods X.

The additional utility or marginal utility that he obtains by consuming each successive unit of goods X goes on decreasing till it goes down to zero at the 6^th unit.

Then it becomes negative with the 7^th units.

 

The 6^th unit of good X yields no additional satisfaction and the 7^th unit has a negative utility.

As shown in column (2), the total utility goes on increasing until the consumption of the 5^th unit.

But if we look at it more carefully, we will notice that total utility increases at a diminishing rate.

 

It is due to the diminishing marginal utility that the total utility increases at a decreasing rate.

As the individual’s consumption of good X rises from the 6^th unit to the 7^th unit, the total utility decreased from 30 units to 28 units.

It implies that the additional or marginal utility of the 7^th unit is negative i.e. –2 units.

 

In the above table, quantity of good X is measured along the X-axis and marginal utility is measured along the Y-axis.

Here, MUx is the marginal utility curve, which is derived on the basis of an individual’s consumption of successive units of good X.

 

The marginal utility curve is downward sloping.

This means that the marginal utility derived from the successive units of good X goes on declining.

Further, the marginal utility curve goes on declining throughout and even falls below the X-axis.

Portion below the X-axis indicates negative utility.

 

It can be observed from figure that as long as the marginal utility is positive the total utility increases at a decreasing rate which is shown by upward sloping portion of the total utility curve TUx.

 

Total utility is maximum where the marginal utility is zero.

When the consumer consumes 6^th unit of X his marginal utility becomes zero, this reflects the state of maximum satisfaction.

 

So, corresponding to 6^th unit of X, the total utility becomes maximum, 30 utils.

When marginal utility becomes negative, the total utility curve starts to fall as shown by the downward sloping portion of TUx curve in the figure.

 

 

 

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Limitation of the Law of Diminishing Marginal Utility

The law of diminishing marginal utility is based on certain assumptions.

In most of the time, these assumptions are applicable.

The conditions under which this law is not applicable are called the limitations or criticisms of this law.

The law of diminishing marginal is not applicable in case of the following situation:

 

Rare and curious goods

Consumer consumes or uses several rare and curious goods.

For example, old stamps, old coins and so on.

In case of these goods, the marginal utility goes on increasing rather than decreasing.

So, the law of diminishing marginal utility does not hold true.

 

Habitual goods

Several consumers may be habitual with different goods like cigarettes, alcohols, drugs etc.

The consumers consume more and more units of such goods.

The additional level of satisfaction goes on increasing rather than decreasing.

                                                                                     

Goods of entertainments

The law of diminishing marginal utility is not applicable in case of goods of entertainment like watching movies, popular TV programmes, popular games like football and T20 cricket etc.

The further (next) watching of these entertainment programmes does not decrease satisfaction.

 

Unequal size and quality

The law of diminishing marginal utility is applicable if the size of commodities is same and is of same quality.

But it is not applicable in case of unequal size because the big size commodity provides higher satisfaction than smaller size.

Likewise, if the second commodity has superior quality than first commodity; the utility from the second commodity will be greater than that of first commodity.

 

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Public goods and basic goods

People consume various public goods like-road, public park, street light etc.

Likewise, they consume many basic goods like food, cloths, shelter etc.

In the use of these goods, the level of satisfaction from additional units does not decrease.

So, it is against this law.

 

Rational consumer

The law assumes that consumer is a rational (thankful, intelligent) person.

He aims to maximize his utility.

The theory is applicable in case of only rational consumer.

However, it is very difficult to find the rational consumer as expected by the law.

 

Short time period

The law assumes the consumer consumes various units of a commodity continuously in a short period of time.

Therefore, the law is not applicable if the consumer consumes the commodity in a long period of time with breaks or gaps.

 

Constant taste and preference

The law is applicable if and only if the taste and preference of the consumer remains constant.

In case of changing tastes and preferences, the law is not applicable.

 

Normal goods

The theory assumes that goods are related to the normal goods.

Normal goods have positive or direct relationship between the demand and income of the consumer.

They are not related with habit, custom, religion, fashion, rare collection and money.

Besides normal goods, the law is not applicable.

 

Continuity

The consumer should consume the goods continuously.

There should not be long time gab at the time of consumption.

Otherwise this will not apply.

 

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