LAW OF DIMINISHING MARGINAL UTILITY

This Law was for the first time given by Gossen and Bentham.
It is also called the first law of Gossen.
But Alfred Marshall developed the law in England.
This Law states that when a person consumes the same
commodity continuously the Marginal utility from the additional
units diminishes.
Marshall defined the law as follows, “The additional benefit
which a person derives from a given increase of a stock of a thing
diminishes with every stock that he already has”.
ASSUMPTIONS
Cardinal measurement of utility: The law of D.M.U assumes that
the consumer is capable of expressing the units numerically.
Ceteris Paribus: Factors influencing consumption like income ,
taste, habits to remain constant.
Rationality: D.M.U assumes rationality on the part of the
consumer i.e. he attempts to get maximum satisfaction.
Homogeneity: Units of consumption are homogeneous or
identical in quality, size, flavour, taste and appearance
ASSUMPTIONS
Continuity: Goods should be consumed one after the other
without any time gap .
Standard units :Units of consumption should be of reasonable
size. Eg: If we consume coffee, it should be a cup of coffee and
not a spoon of coffee.
Marginal utility of money remains constant : Since money is used
as a measuring rod of utility M.U of money remains constant and
not decreases.
Any change in these assumptions would prevent the operation of
the law.
ILLUSTRATION OF THE LAW
This law can be explained in the following manner:
Suppose a traveller consumes oranges, the first orange gives him
great utility, second one a little less, third one very little, fourth one
none at all and fifth one gives him disutility.
This Law can be illustrated with the help of a schedule
Units of Consumption Total Utility in Utils Marginal Utility in utils
( Oranges)
1 3 3

2 5 2 (5-3)

3 6 1 (6-5)

4 6 0 (6-6)

5 5 -1 (5- 6)
 In the above table we see that M.U diminishes from 3 to 1, then
it drops to Zero in the fourth unit and -1 in the fifth unit.

On the other hand T.U increases when M.U diminishes . In the
above table we see T.U reaches maximum i.e. 6 when M.U is
Zero .

T.U diminishes when M.U is negative . In the above table we see

when M.U is -1 total utility diminishes to 5
 In the above figure number of oranges consumed is measured
on the X axis and T.U & M.U on the Y axis ( both are drawn on
the same axis to see the relationship).

In the graph we see that when M.U is Zero, T.U is maximum.

When M.U is negative ,T.U diminishes (falls to 5 ).

We also see that M.U curve is downward sloping.

WHY DOES THE LAW OPERATE ?
There are TWO Reasons
1.Satiability of particular Wants :
Human wants are unlimited and the means to satisfy the wants
are scarce.
Multiplicity of wants makes satisfaction of all wants impossible.
Only some wants can be completely satisfied.
To satisfy some wants it is necessary to consume the same
commodity continuously.
When the desire for every successive unit becomes less, utility
diminishes.
2. Imperfect Substitution of Commodities:
Commodities do not have perfect substitutes.
So consumers have to consume the same commodity
continuously.
So the M.U is bound to diminish.
Consumer’s equilibrium:
 The law assumes rationality on the part of the consumer.
 Rationality means effort to maximise satisfaction with limited
resources.
 Consumer is in equilibrium when he gets maximum satisfaction.
 According to this law the consumer is in equilibrium when M.U
is Zero and T.U is maximum.

This can be shown diagrammatically.

 In the above figure MU represents marginal utility and T.U is
Total utility.

Mu curve goes on diminishing throughout.

TU curve increases at a diminishing rate in the beginning.

Once the equilibrium is attained TU curve starts to decrease

EXCEPTIONS TO THE LAW :

Some writers have brought forward what they call exceptions to

the Law.

These are not real Exceptions .

They only show that the Law does not operate if any one of the
assumptions are absent.
 1. RARE COLLECTIONS :
 It is said that in the case of rare Collections like stamp
collections, coin collections etc the law does not operate. M.U tends to
increase with every additional unit of collection.
This is not true .
Here we observe the violation of the assumption of Homogeneity .

If the stamps and coins are of the same type then M.U diminishes.
 2. ART :
 It is said that in the case of music the law does not operate.
M.U tends to increase while listening to music.
This is not true .
If One listens to the same piece of music again, M.U diminishes
 3 . MISERS :
 It is said that the law does not apply to misers.
 Greed of the Miser increases when his stock of money increases.
 So the M.U of money is believed to increase when the miser acquires
additional units of money
This is not true .
 Even a miser spends his money, at least for the satisfaction of hos
basic needs.
His expenditure indicates that he gives more importance to satisfaction
of wants rather than to acquisition of wealth.
 4 . DRUNKARDS :
 It is said that the law does not apply in the case of liquor.
 M.U is believed to increase with every additional dose to a drunkard.
This is not true .
 This may be true up to a certain stage, but after that M.U of liquor will
diminish even for a drunkard .
 5 . READING & WRITING :
 It is said that a scholar gets more and more satisfaction when he
reads every additional book as he acquires more knowledge.
 Similarly , every writer’s satisfaction increases when the number of his
work increases.
This is not true .
 Reading and writing the same type of book utility diminishes .
 SIGNIFICANCE :
1. Foundation of other Laws:
The Law of D.M.U provides the base for various laws of consumption
such as law of Equi- Marginal Utility and the Law of demand.
It is easy to derive the law of demand from the law of D.M.U.
The law of demand explains that larger quantities will be bought at a
lower price.
As Quantity purchased increases the M.U diminishes.
So , people are ready to buy more only at a low price.
 2. Differentiates between value in use and value in exchange:
Value in use refers to utility and value in exchange is price
This helps us to know the famous Diamond – water Paradox.
Nothing is useful than water but it has less or no value in exchange.
Diamond is less useful but it has great value in exchange.
Reason
Value is determined by M.U . Since water is a free good ( less costly ) it
is consumed till its M.U falls to Zero. But this is not so in the case of
diamonds.
 3. Used in Public Finance:
 This law is used by Marshall to support Progressive tax system.
As Income increases M.U of money decreases.
So Progressive taxation is necessary for the burden of tax will fall on
the rich people with which the poor people can be benefitted.(
Principle of Social advantage is based on this ).
 4. The law is of use to the Producers and sellers:
 If the producers wish to sell more, he knows that he must be willing
to reduce the price.
5. The law is the basis of the Policy of redistribution of wealth:

 The government’s Taxation cum Expenditure Policy helps in

transferring power from the rich to the poor people .
 CRITICISMS :
1. Utility is not measurable :
The Law assumes the Cardinal Measurement of utilty . But critics have
pointed out that utility can just be experienced and compared but cannot
be measured.

2. Other things are not always constant:

The law makes the famous assumption of ceteris paribus, but Income,
taste, fashion, price of related goods cannot remain constant for along
time.
 3. Unrealistic assumptions:
The Law is based on unrealistic assumptions like continuous
consumption of the same commodity, homogeneity and rationality..

4. M.U of money is not constant:

M.U of money like any other good is bound to decrease when the stock
increases.
5. It ignores the complementarity and substitutability of goods and
services.
THANKYOU