Utility Analysis: Law of Diminishing marginal Utility (DMU)
Dr. Marshall states this, law as follow: The additional benefit which a person derives from a given increase of his stock of anything diminishes with the growth of the stock that he has another words the law of DMU simply states that other things being equal, the marginal utility derived from successive units of a given commodity goes on decreasing. Hence the more we have of a thing; the less we want of it, because every successive unit gives less and less satisfaction.
The law is explained with the help of following example
Units of commodity No. Of mangoes
Total Utility (TU)
Marginal Utility (MU)
It will be better to know some terms for understanding the law and they are.
Initial Utility: It is the utility of the initial or the first unit. In the table initial utility is 8
Total Utility: In column 3 of the table, it gives the total utility at each step. For example it you consume on mango are total utility is 3, if you consume two mangoes, the total utility is 14.
Zero Utility: When the consumption of a unit of a commodity makes no addition to the total utility, then it is the point of zero utility. In our table, the TU after the 3rd unit is consumed is 16 and ar the 4th also it is 16. Thus, the 4th mango results in no increase. Thus is the point of zero utility. It is seen that the total utility is maximum when the MU is zero.
Marginal Utility: The addition to the total utility by the consumption of the last unit considered just worthwhile. The can be worked out by using following formula.
Negative Utility: It the consumption of a unit of a commodity is carried to excess, then instead of giving any satisfaction, it may cause dissatisfaction. The utility in such cases is negative. In the table given above the marginal utility of the 5th unit is negative.
Assumptions: The assumptions of the law of DMU are:
All the units of the given commodity are homogenous i.e. identical in size shape, quality, quantity etc.
The units of consumption are of reasonable size. The consumption is normal.
The consumption is continuous. There is no unduly long time interval between the consumption of the successive units.
The law assumes that only one type of commodity is used for consumption at a time.
Though it is psychological concept, the law assumes that the utility can be measured cardinally i.e. it can be expressed numerically.
The consumer is rational human being and he aims at maximum of satisfaction.
Exceptions: The exceptions to the law of DMU are as follows:
Hobbies: In case of certain hobbies like stamp collection or old coins, every addition unit gives more pleasure. MU goes on increasing with the acquisition of every unit.
Drunkards: It is belives that every does of liquor Increases the utility of a drunkard.
Miser: In the case of miser, greed increases with the acquisition of every additional unit of money.
Reading: reading of more books gives more knowledge and in turn greater satisfactions.
Importance of the law of DMU:
Basic of economic law and concepts: This law of DMU forms the basis of law of demand, law of Equimarginal utility, elasticity of demand etc.
Public finance: The Govt. can impose and justify progressive income tax on the ground of this law, as the income increases, the MU of income diminishes.
Businessmen: A businessman or producer can increase the sale of his product by fixing a lower price. Since consumers tend to buy more to equate MU with price, a producer can expect a rise in sale.