Law of Diminishing Marginal Utility:
Definition of the Law:
"Other things remaining the same when a person takes successive units of a
commodity, the marginal utility diminishes constantly".
The marginal utility of a commodity diminishes at the consumer gets larger
quantities of it. Marginal utility is the change in the total utility resulting
from one unit change in the consumption of a commodity per unit of time.
Following are the assumptions of the law of diminishing marginal utility.
- The utility is measurable and a person can express the utility derived
from a commodity in qualitative terms such as 2 units, 4 units and 7 units
- A rational consumer aims at the maximization of his utility.
- It is necessary that a standard unit of measurement is constant
- A commodity is being taken continuously. Any gap between the consumption
of a commodity should be suitable.
- There should be proper units of a good consumed by the consumer.
- It is assumed that various units of commodity homogeneous in
- The taste of the consumer remains same during the consumption o the
successive units of commodity.
- Income of the consumer remains constant during the operation of the law
of diminishing marginal utility.
- It is assumed that the commodity is divisible.
- There should be not change in fashion. For example, if there is a
fashion of lifted shirts, then the consumer may have no utility in open
- It is assumed that the prices of the substitutes do not change. For
example, the demand for CNG increases due to rise in the prices of petroleum
and these price changes effect the utility of CNG.
Explanation With Schedule and Diagram:
We assume that a man is very thirsty. He takes the glasses of water
successively. The marginal utility of the successive glasses of water decreases,
ultimately, he reaches the point of satiety. After this point the marginal
utility becomes negative, if he is forced further to take a glass of water. The
behaviour of the consumer is indicated in the following schedule:
|Units of commodity
On taking the 1st glass of water, the consumer gets 10 units of utility,
because he is very thirsty. When he takes 2nd glass of water, his marginal
utility goes down to 8 units because his thirst has been partly satisfied. This
process continues until the marginal utility drops down to zero which is the
saturation point. By taking the seventh glass of water, the marginal utility
becomes negative because the thirst of the consumer has already been fully
The law of diminishing marginal utility can be explained by the following
diagram drawn with the help of above schedule:
In the above figure, the marginal utility of different glasses of water is
measured on the y-axis and the units (glasses of water) on X-axis. With the help
of the schedule, the points A, B, C, D, E, F and G are derived by the different
combinations of units of the commodity (glasses of water) and the marginal
utility gained by different units of commodity. By joining these points, we get
the marginal utility curve. The marginal utility curve has the downward negative
slope. It intersects the X-axis at the point of 6th unit of the commodity. At
this point "F" the marginal utility becomes zero. When the MU curve goes beyond
this point, the MU becomes negative. So there is an inverse functional
relationship between the units of a commodity and the marginal utility of that
Exceptions or Limitations:
The limitations or exceptions of the law of diminishing marginal utility are
- The law does not hold well in the rare collections. For example,
collection of ancient coins, stamps etc.
- The law is not fully applicable to money. The marginal utility of money
declines with richness but never falls to zero.
- It does not apply to the knowledge, art and innovations.
- The law is not applicable for precious goods.
- Historical things are also included in exceptions to the law.
- Law does not operate if consumer behaves in irrational manner. For
example, drunkard is said to enjoy each successive peg more than the
- Man is fond of beauty and decoration. He gets more satisfaction by
getting the above merits of the commodities.
- If a dress comes in fashion, its utility goes up. On the other hand its
utility goes down if it goes out of fashion.
- The utility increases due to demonstration. It is a natural element.
Importance of the Law of
Diminishing Marginal Utility:
The importance or the role of the law of diminishing marginal utility is as
- By purchasing more of a commodity the marginal utility decreases. Due to
this behaviour, the consumer cuts his expenditures to that commodity.
- In the field of public finance, this law has a practical application,
imposing a heavier burden on the rich people.
- This law is the base of some other economic laws such as law of demand, elasticity
of demand, consumer surplus and the law of substitution etc.
- The value of commodity falls by increasing the supply of a commodity. It
forms a basis of the theory of value. In this way prices are determined