LAW OF DIMINISHING MARGINAL UTILITY WITH

SPECIAL REFERENCE TO LIQUOR CONSUPTION

Submitted To: Submitted By:

Dr. Eritriya Roy Kshitij Awasthi

(Faculty Economics Dept.) Roll No. – 82

Section -- A

Date of Submission: 23rd October 2019

________________________________________________________

Hidayatullah National Law University, Post Uparwara,

Abhanpur, Atal Nagar – 493661 (Chhattisgarh)
 DECLARATION
I, Kshitij Awasthi, hereby declare that, this project report entitled, ‘Law Of Diminishing
Marginal Utility With Special Reference To Liquor Consumption’submitted to
Hidayatullah National Law University, Raipur is record of an original work done by me
under the guidance of, Dr. Eritriya Roy, Faculty Economics Department, Hidayatullah
National Law University, Raipur and that no part of this work has been plagiarized without
citations.

Kshitij Awasthi

Roll No. - 82

Semester 1st
B.A.L.LB. (Hons.)

Section – A

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 CERTIFICATE BY FACULTY
I, Dr. Eritriya Roy, faculty of Legal method, Hidayatullah National Law University Raipur
(C.G) do hereby declare that this project entitled “Law of Diminishing Marginal Utility
With Special Reference to Consumption of Liquor” has been completed by Kshitij
Awasthi, student of Semester I (A) under my guidance.

Signature

Dr. Eritriya Roy

(Faculty of Sociology
Department)

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 ACKNOWLEDGEMENT
I, Kshitij Awasthi, would like to humbly present this project to Dr. Eritriya Roy Ma’am for
her encouragement and guidance regarding several aspects of this project. I am thankful for
being given the opportunity of doing a project on “Law of Diminishing Marginal Utility
With Special Reference to Consumption of Liquor”.
I am thankful to the library staff as well as the IT lab staff for all the conveniences, they have
provided me with, which have played a major role in the completion of this paper.
I would like to thank God for keeping me in good health and senses to complete this
project.
Last but definitely not the least, I am thankful to my seniors for all their support, tips and
valuable advice whenever needed. I present this project with a humble heart.

Name: Kshitij Awasthi

Semester-1st
Section-A
Roll No. – 82
B.A.L.LB. (Hons.)

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 TABLE OF CONTENTS
DECLARATION ................................................................................. i
CERTIFICATE BY FACULTY ....................................................... ii
ACKNOWLEDGEMENT ................................................................ iii
INTRODUCTION ...............................................................................v
OBJECTIVES .................................................................................... vi
RESEARCH METHODOLOGY .................................................... vi
CHAPTERISATION........................................................................ vii
CHAPTER 1: The Concept Named Utility .......................................1
CHAPTER 2: Law of Diminishing Marginal Utility .......................2
CHAPTER 3: The Case of Liquor .....................................................6
CONCLUSION AND INTERPRETATION ..................................10
REFERENCES ..................................................................................11

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 INTRODUCTION
The law of diminishing marginal utility is one of the most important concepts in
microeconomics. The law explains to us the mechanism behind the psychology of the
consumer regarding his consumption patterns.

Consumption in today’s market, is a very important factor in microeconomics. The pattern in

which people react to changes in the market is of dire importance in the field of economics.
This pattern is portrayed by the law of diminishing marginal utility. The concept is of
instrumental importance in the field.

Through the law of Diminishing Marginal Utility it is very established how the utility or the
satisfaction derived by a person from every additional unit of the particular commodity that a
person consumes, keeps on decreasing.

But when the concept is applied in the actual dynamic environment where several other
factors also play a role the law is never the same, which is why the law is always stated with
certain assumptions and exceptions, which are discussed further in this report.

The major issue which is highlighted in the title of this project report is the operation of this
law during consumption of liquor. This issue is dealt with, very comprehensively in this
report where it is found that how this commodity defies all possible probabilities as it neither
does it completely violate the law of DMU nor it follows the law. There are several factors
that play a role in this namely, the price of liquor, the level of addiction, the will power to
avoid or not to avoid. This becomes more of a psychological concept than an economical one.

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 OBJECTIVES
1. To understand the functioning of the Law of Diminishing Marginal Utility in the case
of Consumption of Alcohol
2. To investigate different categories under which consumers of alcohol can be
classified.
3. To understand whether in any case can an alcohol consumer follow the normal
operation of the La

RESEARCH METHODOLOGY
Mode of Presentation: This project is analytical and descriptive as the project is Empirical
in nature.

Collection of Data: The data is primarily primary and secondary in nature. It is done through
random sampling by mode of physical interview.

Data Size: The study was conducted on 20 people

Scope of Study: The present report is not Gender Specific but was restricted to the Batch
XIX of HNLU B.A.LL.B.(Hons.) course. More and more vivid variety of people were
interviewed for the purpose of collection of data. The study was limited to only alcohol as
far as the subject matter of the study is concerned.

Limitations of Study: Although due to the help of other batch mates the process of the study
was a smooth one but still there were some limitations during the study:
• Few people were not interested in the study
• Lack of availability of secondary data
• Time Limitations
• False Feedback by some subjects

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 CHAPTERISATION
Page
S.No. Name
No.
1 The Concept Named Utility 1
Explanation 2
Law of Diminishing Marginal
2 Assumptions 4
Utility
Limitations 4
Type 1 6
3 The Case of Liquor
Type 2 7

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 CHAPTER 1: The Concept Named Utility
The concept of utility is one of the most fundamental aspects of microeconomics. It serves as
the foundation for various other concepts in the subject.

Any individual consumes goods and services due to the satisfaction which he receives by its
consumption. The higher the satisfaction the higher is the urge for further consumption.

Utility refers to want satisfying power of a commodity. It is the satisfaction, actual or

expected, derived from the consumption of a commodity. Utility differs from person- to-
person, place-to-place and time-to-time. In the words of Prof. Hobson, “Utility is the ability
of a good to satisfy a want”.

But the issue arises when there are arguments on the level of satisfaction received. This
divided economists into two segments- the cardinal approach, the one which believes that
utility can be measured in numbers and the other, the ordinal approach which believes that
utility being an intangible concept cannot be numbered but can only be ranked.

The Cardinal Utility approach is propounded by neo-classical economists, who believe that
utility is measurable, and the customer can express his satisfaction in cardinal or quantitative
numbers, such as 1, 2, 3, and so on. The cardinal utility approach is used as a basis for
explaining the consumer behaviour where each and every individual aims at maximizing
his/her utility or satisfaction for the amount of money he spends on the consumption of goods
and services.

The Ordinal Utility approach is based on the fact that the utility of a commodity cannot be
measured in absolute quantity, but however, it will be possible for a consumer to tell
subjectively whether the commodity derives more or less or equal satisfaction when
compared to another.

The Law of Diminishing Marginal Utility is based on Cardinal approach for measuring
utility from any commodity or service. The law tries to evaluate the satisfaction which one
derives from the consumption of goods and services and then tries to understand patterns of
consumer behaviour. It tries to further understand the concepts of consumer equilibrium.

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 CHAPTER 2: Law of Diminishing Marginal Utility

Explanation

The Law of Diminishing Marginal Utility was propounded by the German economist H.H.
Gossen in the 19th century. Gossen explains the behaviour of the consumers and the basic
tendency of human nature. Hence, this law is also known as Gossen's First Law. This was
further modified by Marshall.

In the words of Marshall “The Law of Diminishing Marginal Utility is defined as the
additional utility which a person derives from an increase of his stock of a commodity
diminishes with every increase in the stock that he or she already has.”

In order to understand the concept of the law, one must first understand the concepts of
marginal utility. Marginal utility refers to additional utility on account of the consumption of
an additional unit of a commodity. For e.g.- if 10 units of a commodity yield satisfaction of
100 utils and then the total satisfaction derived after consumption of the 11th unit is equal to
105 utils, the marginal utility for the 11th unit of the commodity is equal to 5.

The law of Diminishing Marginal Utility states that as more and more units of a commodity
are consumed, the marginal utility derived from every additional unit of the commodity keeps
declining and may even become negative.

In the words of Alfred Marshall, During the course of consumtion , as more and more units of
a commodity are used, every successive unit gives utility with a diminishing rate, provided
other things remaining the same, although the utility increases.”

Example to Demonstrate Law of Diminishing Marginal Utility

This law can be illustrated with the help of a table shown below:

Units of Orange Total Utility Marginal Utility

Unit 1 6 6

Unit 2 10 4

Unit 3 12 2

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Unit 4 12 0

Unit 5 10 -2

Unit 6 6 -4

The table shows that when a consumer consumes 1st unit of orange he derives the marginal
utility equal to 6utils. As the consumer consumes 2nd and 3rd units of orange, the marginal
utility is declined from 4utils to 2utils respectively.
When he consumes 4th unit of orange the marginal utility becomes zero, which is called the
point of satiety. Similarly, from the consumption of 5th and 6th units of orange, the marginal
utility becomes negative, i.e., he gets disutility instead of utility from these units of
consumption.
Thus, the table shows that a consumer consumes more and more units of a commodity at a
certain period of time, the marginal utility declines, becomes zero and even negative.

This law can be further explained with the help of a diagram:

Marginal Utility Curve

8

0
Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Unit 6
-2

-4

-6

Marginal Utility Curve

In the figure, X-axis represents units of orange and Y-axis represents utility.MU is the marginal utility
curve which slopes downward from left to right. It means that as a consumer consumes more and
more units of a commodity, the marginal utility he derives from the additional unit of consumption
goes on declining, becomes zero and even negative.

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But the Laws in economics are not absolute. They have their own set of assumptions and
exceptions.

Assumptions of the Law:

The Law of Diminishing Marginal Utility is based on the assumptions:

1. The utility that a consumer gets can be measured and expressed in numbers (utils).
Moreover, the units of the commodity must be properly defined.

2. The maximum price a consumer is ready to pay for the commodity depends on its marginal
utility to him.

3. The taste and preference of the consumer remain unchanged during the period of
purchases.
4. The initial amount of consumption is sufficient to give the consumer full satisfaction.

Limitations of the Law:

The Law may not operate in certain circumstances and in those exceptional cases the
marginal utility of a thing may increase for some time.
Five important exceptional cases to the law are:

1. Change in Taste and Preferences:

If a consumer’s taste changes so that he likes a commodity more, the marginal utility of any
quantity of that commodity rises. For example A person may not have initially any interest in
eating egg roll. But after taking one egg roll, he may form a good taste for it and may get a
great satisfaction from the 2nd or the 3rd roll or unit.

2. Inadequate Initial Consumption:

If a person consumes a very small quantity of a particular thing at the initial stage, he may not
get full satisfaction from it. In such a case his satisfaction will be greater from the second
unit. Thus, a larger second glass of coke would give more satisfaction to a person than what
he got from the first small glass.

3. Rare Collection:
The marginal utility of a thing does not diminish when a buyer purchases it in a larger
quantity out of sheer emotion or fancy or the will of making a collection. An example is the
art work of a known painter or a rare book of a dead author.

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4. Habitual goods
The law will not be applicable for habitual goods such as consumption of cigarettes,
consumption of drugs, alcohol, etc.

5. Consumption at Different Time Periods:

If a person consumes different units of a particular thing at different times, the marginal
utility from the successive units is not likely to be smaller. Thus, if he consumes the 1st ice-
cream in the morning, the 2nd in the afternoon and the 3rd at night, the marginal utility may
not diminish.

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 CHAPTER 3: The Case of Liquor
The Law Of Diminishing Marginal Utility has some exceptions as discussed above. And as
discussed above, alcohol is one of them as it is covered in the category of addiction.

But the case of liquor is not as simple as it looks initially. There are various factors that still
play a role.

Liquor is consumed by two kinds of people, first are those who willingly want to drink
alcohol, second are those who are either forced into doing it or do it under peer pressure.

TYPE 1

For the first group of people, during the consumption, even after the presence of assumptions
for the law of DMU to operate like homogenous units, continuous consumption, the law does
not opearate and the law is completely defied. After every additional unit of liquor the will to
consume more and more increases and subsequently the satisfaction derived from each unit
also increases but after a certain point when the effect of alcohol is increased to a point that
even an intoxiacated person starts resisting it is the point where the marginal utility derived
starts decreasing and after a certain point even becomes negative. And as a matter of fact the
decrease in MU after the level of satiety is extremely rapid

A schedule for the same is given below which is developed after the study conducted by the
author of this project report:

No. of commodity Total Utility Marginal Utility

1 5 5
2 12 7
3 22 10
4 37 15
5 65 28
6 85 20
7 97 10
8 102 -2
9 102 -17
10 92 -37

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In the above schedule, the utility from the consumption of the first unit of the commodity
equals to 5 utils. The utility derived from the next unit of the commodity equals to 7 utils and
this marginal utility keeps on increasing with increase in consumption of subsequent units.
And not just that, the rate of increase in Marginal Utility is also increasing. Marginal utility
for each subsequent units keeps on increasing which is the exact opposite to the diminishing
marginal utility. But later when even an intoxicated person starts feeling repulsions to
consume more the Marginal Utility for further units starts decreasing, and after a point, i.e.
the 10th unit becomes negative. One more thing that should be noted here is that the rate of
diminishing is very rapid. Thus, the law of diminishing marginal utility fails in the case of
addictions like liquor and even more precisely in the first group of people as explained above.

Following is the graph that represents the above schedule

MARGINAL UTILITY CURVE

40

30

20

10

0
Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Unit 6 Unit 7 Unit 8 Unit 9 Unit 10
-10

-20

-30

-40

-50

MARGINAL UTILITY CURVE

The above graph is very different from how an actual Marginal Utility Curve looks like.
Hence confirming the fact that at least the first category of the people drinking alcohol do not
follow the Law of Diminishing Marginal Utility.

TYPE 2

Coming to the second category, it includes those people who initially do not wish to consume
alcohol or maybe are the first timers. In my study these kind of people show slightly different
behaviour than the first category of alcohol consumers. Initially, the utility derived by them
from every additional unit decreases. There were various reasons cited by the research
subjects for such a behaviour. Some of them include:

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 • Awful Taste
• Resistance
• Guilt
And others

The matter of fact is that initially the utility derived from every additional unit decreases. But
later the subjects told that after the consumption of certain number of units when they
ultimately get intoxicated the utility derived from further additional units starts increasing.
And then followed by exactly the same trend like it happened in the first category of people

The following schedule is again based on the studies conducted by the author of this project
report:

No. of Units Total Utility Marginal Utility

Unit 1 10 10
Unit 2 17 7
Unit 3 22 5
Unit 4 30 8
Unit 5 42 12
Unit 6 60 18
Unit 7 85 25
Unit 8 103 18
Unit 9 108 5
Unit 10 93 -15

In the above schedule, the utility from the consumption of the first unit of the commodity
equals to 10 utils. The utility derived from the next unit of the commodity equals to 7 utils
which is less than what was obtained from the first unit. Again, the next unit gives 5 utils of
satisfaction. Here we see a change in trend where the subsequent units give lesser
satisfaction, which is different for a case of an exception. But later as explained by the
subjects that when they get intoxicated the subsequent units give more and more satisfaction.
And it is evident in the schedule as the 4th unit gives more satisfaction than 3rd unit which
later keeps on increasing till 7th unit. And then again following the same trend as it happened
for the first type of people there is a rapid decrease in the Marginal Utility resulting in a

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negative MU at the 10th unit, therefore partially defying the Law of Diminishing Marginal
Utility.

Following is the graph that represents the above schedule

Marginal Utility Curve

30

25

20

15

10

0
Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Unit 6 Unit 7 Unit 8 Unit 9 Unit 10
-5

-10

-15

-20

Marginal Utility Curve

The above graph very clearly shows how marginal utility derived from the consumption of
alcohol by the second type of group of people consuming alcohol first decreases, exactly how
the law operates, but later on, like the previous case the marginal utility starts increasing and
that too at an increasing rate and then after the level of satiety again falls at an extremely
rapid rate.

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 CONCLUSION AND INTERPRETATIONS
The current project report has investigated the operation of the Law of Diminishing Marginal
Utility in case of consumption of liquor. In my study I have found out that the concept of
diminishing utility though applies to the case of alcohol but with some variations and that too
it is not same all the time. It depends on the type of person consuming alcohol. As elaborated
in the report the two types of people show almost the same behaviour but not in the
beginning.

In the beginning the Type 2 people (the ones who don’t start drinking willingly) gain lesser
and lesser utility unlike the Type 1 people who start gaining satisfaction at an increasing rate
since the very beginning. Therefore, the Marginal Utility Curve graph of Type 1 people first
rises then reaches to the maximum point and then starts falling and even becomes negative.
Whereas the same graph of the second category of the people initially drops down (following
the law of DMU) but then later start gaining satisfaction at increasing rate. But then again
follows the trend of the previous group, it starts falling and becomes negative.

The thing worth noticing here is that when both the groups start gaining the diminishing
satisfaction, the drop in Marginal Utility is very rapid and increasing. Hence telling about the
fact that when a person gets too high the actual adverse effect of alcohol which initially also
happens to the body starts showing up which initially did not show up due to the habit or
addiction. After a point of time, the harmful effect is not hidden and then brings out the actual
state of the person, that he was actually not gaining anything from any of the unit that he had
already consumed hence bringing out a large aspect where things are not as they seem.

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 REFERENCES
WEBLIOGRAPHY

• https://www.businesstopia.net/
• https://businessjargons.com/

BIBLIOGRAPHY

• T.R. Jain, V.K. Ohri, Introductory Microeconomics for class-11, VK Publisher

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