So far we have covered two important topics of Cardinal Utility Approach and Total and Marginal Utility. Now, it is time to expand our discussion further. So, we will discuss the law of diminishing marginal utility.
According to the law, the utility of a good to a customer diminishes when successive units of that commodity are used, while other things remain the same. Let’s start with an example to get an understanding of how the law works. Let’s say you’re starving one day. You go to your mother and ask her for a bite to eat. There is a packet of cookies in her hand. When you eat your first biscuit, it will provide you immense satisfaction. So that will be really useful. For example, if you eat a 2″ biscuit first, you’ll be less satisfied than if you eat a 3″ biscuit. You might not be ready to eat the sixth biscuit. In this case, the sixth biscuit will be of zero use to the utility. This means that you won’t want to eat another biscuit since its utility to you will reduce with each diminishing day. Most customers behave in this satisfaction when it comes to satisfying their needs. The law of diminishing marginal utility refers to this broad observation of customer behavior.
According to Marshall, the law is as follows: The additional advantage that a person receives from an increase in his stock of anything reduces as his stock increases.
This law may be summarised as follows: The more of a thing we have, the less utility we gain from each new unit of lt.
An example of the law A table and a graphic can be used to demonstrate the law. The table shows that the marginal utility decreases as long as the customer continues to consume bananas one after the other. When the sixth banana is consumed, the number of bananas consumed drops to zero.
| Units of bananas | Total utility (units) | Marginal utility (units) |
| 1 st | 15 | 15 |
| nd 2 | 27 | 12 |
| rd 3 | 36 | 9 |
| 4th | 42 | 6 |
| 5th | 45 | 3 |
| 6th | 45 | 0 |
| 7th | 50 | -5 |
Example of Law of Dimishing Marginal Utility
Diagrams can also be used to demonstrate the law of diminishing marginal utility. In order to do this, a diagram has been drawn up. On the X-axis are bananas, and on the Y-axis are utility units. MU is the utility curve, and Willa is displaying the tendency of utility generated from each consecutive unit of bananas in her chart. Three successive Livery units of banana result in a decreasing slope in the utility curve. In the utility curve, the downward sloping slope represents the law of diminishing marginal utility.
Limitations of the Law of Diminishing Marginal Utility
As the law suggests, exceptions or restrictions relate to those conditions that render a law ineffectual. Among them are:
1. The law does not apply to rare items like gems and jewellery or to hobby products like stamps, coins or art collections. There may be greater utility in the additional coins or gems than the original collection. In actuality, this is not the case, because a jeweler or a diamond collector, a coin and stamp collector, etc. will never want to own many sets of the same type of gems or diamonds. Consequently, the law is applicable in these situations.
2. This law does not apply to the use of intoxicants such as alcohol, heroin, and opium. A drunkard’s satisfaction increases with each extra unit of wine, according to legend. In the case of opium eaters or other drug users, the law is rendered ineffective. The fact that drunkards, opium-eaters, and drug-users become aberrant after consuming intoxicants for an extended period of time can be added to this. Economics cannot deal with abnormality, thus the following example is invalid.
3. In addition, it is stated that this law does not apply to those who have a thirst for power, a love of money, or an urge to show off. When a guy accumulates a large utility of money, each unit of money becomes more valuable to him. The desire for power and the drive to show off one’s wealth are similar. Even while the marginal utility of these wants isn’t zero, it clearly decreases as a person gains greater and greater amounts of wealth and power. Sometimes, he’s just sick of it all. As a result, the law, sooner or later, applies to these items as well.
Assumption of Law of Diminishing Marginal Utility
There are conditions over which this law is based. These are:
I) The quality and quantity of all units of the provided item must be the same The law will become ineffective if there is a change. Let’s take the example of someone who has been starving and has been given a little and a large chapatis. Naturally, the second unit’s utility will be greater than the first, rendering the law useless.
2) It’s important that the consumer’s taste, habits, customs and fashions as well as their temperament and money do not alter. A change in any one of these will raise rather than decrease the utility of the modification.
3) This means that units of the good must be eaten sequentially over a set length of time in order for this law to take effect. The utility of random pieces of bread may not be diminished.
4) The price of the product and its alternative must not vary; if it does, the law will no longer be valid. For example, if the price of an item drops, the customer will be able to purchase more units, and the utility of each extra unit will increase, rendering the law ineffective.
5) The units of the good must be of appropriate size: if water is provided to a very thirsty individual by spoons, the utility of the following spoons of water will rise rather than decrease.