{"id":3566,"date":"2020-02-23T10:49:18","date_gmt":"2020-02-23T10:49:18","guid":{"rendered":"https:\/\/commerceiets.com\/?p=3566"},"modified":"2020-02-23T10:49:18","modified_gmt":"2020-02-23T10:49:18","slug":"law-of-diminishing-marginal-utility","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/","title":{"rendered":"LAW OF DIMINISHING MARGINAL UTILITY"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_71 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/#LAW_OF_DIMINISHING_MARGINAL_UTILITY\" title=\"LAW OF DIMINISHING MARGINAL UTILITY\">LAW OF DIMINISHING MARGINAL UTILITY<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/#ASSUMPTIONS_OF_LAW_OF_DIMINISHING_MARGINAL_UTILITY\" title=\"ASSUMPTIONS OF LAW OF DIMINISHING MARGINAL UTILITY\">ASSUMPTIONS OF LAW OF DIMINISHING MARGINAL UTILITY<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/#EXPLANATION_OF_THE_LAW\" title=\"EXPLANATION OF THE LAW\">EXPLANATION OF THE LAW<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/#CAUSES_OF_LAW_OF_DIMINISHING_MARGINAL_UTILITY\" title=\"CAUSES OF LAW OF DIMINISHING MARGINAL UTILITY\">CAUSES OF LAW OF DIMINISHING MARGINAL UTILITY<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/#EXCEPTIONS_OF_LAW_OF_DIMINISHING_MARGINAL_UTILITY\" title=\"EXCEPTIONS OF LAW OF DIMINISHING MARGINAL UTILITY\">EXCEPTIONS OF LAW OF DIMINISHING MARGINAL UTILITY<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/#IMPORTANCE_OF_LAW_OF_DIMINISHING_MARGINAL_UTILITY\" title=\"IMPORTANCE OF LAW OF DIMINISHING MARGINAL&nbsp; UTILITY\">IMPORTANCE OF LAW OF DIMINISHING MARGINAL&nbsp; UTILITY<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/#CRITICISMS_LIMITATIONS_OF_LAW_OF_DIMINISHING_MARGINAL_UTILITY\" title=\"CRITICISMS \/LIMITATIONS OF LAW OF DIMINISHING MARGINAL UTILITY\">CRITICISMS \/LIMITATIONS OF LAW OF DIMINISHING MARGINAL UTILITY<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/#CONCLUSION\" title=\"CONCLUSION\">CONCLUSION<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"law-of-diminishing-marginal-utility\"><span class=\"ez-toc-section\" id=\"LAW_OF_DIMINISHING_MARGINAL_UTILITY\"><\/span><strong>LAW OF DIMINISHING MARGINAL UTILITY<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The Law of Diminishing Marginal <a href=\"https:\/\/commerceiets.com\/utility-analysis\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Utility (opens in a new tab)\">Utility<\/a> states that the amount of satisfaction provided by the consumption of every additional unit of a good decrease as we increase the consumption of that good. Marginal Utility is the change in the utility derived from the consumption of an additional unit of a good.<\/p>\n\n\n\n<p><strong>Mr. H. Gossen,<\/strong>&nbsp;a German economist, was first to explain this law in 1854.&nbsp;This is also known as <strong>Gossen\u2019s First Law of consumption.<\/strong><\/p>\n\n\n\n<p><strong>ACCORDING TO ALFRED MARSHALL&nbsp;<\/strong><\/p>\n\n\n\n<p>\u201cThe additional benefit which a person derives from an\nincrease of his stock of a thing diminishes with every increase in the stock\nthat already has\u201d.<\/p>\n\n\n\n<p><strong>ACCORDING TO PAUL A. SAMUELSON,<\/strong><\/p>\n\n\n\n<p>\u201cAs\nthe amount consumed of a good increases, the marginal utility of the good leads\nto decrease.\u201d<\/p>\n\n\n\n<p><strong>ACCORDING TO PROF. K E BOULDING<\/strong><\/p>\n\n\n\n<p>\u201cAs a consumer\nincreases the consumption of any one commodity, keeping consumption of all\nother commodities constant, the marginal utility of the variable commodity must\neventually decline.\u201d<\/p>\n\n\n\n<p><strong>ACCORDING TO PROF. THOMAS<\/strong><\/p>\n\n\n\n<p>\u201cThe utility of\nadditional supplies of a commodity diminishes with every increase but at a\ndiminishing rate until eventually, any further increments of the commodity may\neven have disutility\u201d.<\/p>\n\n\n\n<p><strong>ACCORDING TO PROF. EDWARD NEVIN <\/strong><\/p>\n\n\n\n<p>\u201cThe extra\nsatisfaction derived from the consumption of additional units of any commodity\ntends to decline as the quantity consumed increases.\u201d<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"assumptions-of-law-of-diminishing-marginal-utility\"><span class=\"ez-toc-section\" id=\"ASSUMPTIONS_OF_LAW_OF_DIMINISHING_MARGINAL_UTILITY\"><\/span><strong>ASSUMPTIONS OF LAW OF DIMINISHING MARGINAL UTILITY<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The\nlaw of diminishing marginal utility is true under certain assumptions. These\nassumptions are as under:&nbsp;<\/p>\n\n\n\n<p><strong>(i) Rationality:<\/strong>&nbsp;In the&nbsp;cardinal utility analysis, it is assumed that the consumer is\nrational. He aims at maximization of utility subject to availability of his\nincome.<\/p>\n\n\n\n<p><strong>(ii) Constant marginal utility of\nmoney:<\/strong>&nbsp;It is assumed in the theory\nthat the marginal utility of money based for purchasing goods remains constant.\nIf the marginal utility of money changes with the increase or decrease in\nincome, it then cannot yield correct measurement of the marginal utility of the\ngood.<\/p>\n\n\n\n<p><strong>(iii) Diminishing marginal\nutility:<\/strong>&nbsp;Another important\nassumption of utility analysis is that the utility gained from the successive\nunits of a commodity diminishes in a given time period.<\/p>\n\n\n\n<p><strong>(iv) Utility is additive:<\/strong>&nbsp;In the early versions of the theory of consumer behavior, it was assumed that the utilities of different commodities are independent. The total utility of each commodity is additive.<\/p>\n\n\n\n<p><strong>(v) Consumption to be continuous:<\/strong>&nbsp;It is assumed in this law that the\nconsumption of a commodity should be continuous. If there is interval between\nthe consumption of the same units of the commodity, the law may not hold good.\nFor instance, if you take one glass of water in the morning and the 2nd&nbsp;at\nnoon, the marginal utility of the 2nd&nbsp;glass of water may increase.<\/p>\n\n\n\n<p><strong>(vi) Suitable quantity:<\/strong>&nbsp;It is also assumed that the commodity\nconsumed is taken in suitable and reasonable units. If the units are too small,\nthen the marginal utility instead of falling may increase up to a few units.<\/p>\n\n\n\n<p><strong>(vii) Character of the consumer\ndoes not change:<\/strong>&nbsp;The law holds true if there\nis no change in the character of the consumer. For example, if a consumer\ndevelops a taste for wine, the additional units of wine may increase the\nmarginal utility to a drunkard.<\/p>\n\n\n\n<p><strong>(viii) No change to\nfashion:&nbsp;<\/strong>Customs and tastes: If there is a\nsudden change in fashion or customs or taste of a consumer, it can than make\nthe law inoperative.<\/p>\n\n\n\n<p><strong>(ix) No change in the price of\nthe commodity:&nbsp;<\/strong>there should be any change in the\nprice of that commodity as more units are consumed.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"explanation-of-the-law\"><span class=\"ez-toc-section\" id=\"EXPLANATION_OF_THE_LAW\"><\/span><strong>EXPLANATION OF THE LAW<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The law of diminishing marginal utility can be explained with the help of following table and diagram:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/02\/MARGINAL-UTILITY-TABLE-1-2.jpg\" alt=\"\" class=\"wp-image-3568\"\/><figcaption><strong>LAW OF DIMINISHING MARGINAL UTILITY<\/strong><\/figcaption><\/figure>\n\n\n\n<p>Table reveals that the utility derived by consumer from additional unit of apple decreases. The marginal utilities from different units are 8, 6, 4 and so on. The marginal utility from the 5th unit is zero and thereafter it is negative.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2020\/02\/clip_image004_thumb-1-1.png\" alt=\"\" class=\"wp-image-3569\"\/><figcaption><strong>LAW OF DIMINISHING MARGINAL UTILITY<\/strong><\/figcaption><\/figure>\n\n\n\n<p>In\nthe diagram, numbers of apples are shown on OX-axis and marginal utility on the\nOY-axis. MU curve shows the decreasing trend of all the units of apples. The\n5th unit of apple gives zero (0) MU while the 6th unit gives negative marginal\nutility. A is the point of satiety, thereafter consumer should not consume\nadditional unit of apple.<\/p>\n\n\n\n<p><strong>There are three stages of marginal utility as\ngiven below:<\/strong><\/p>\n\n\n\n<p>(i) MU shows a decreasing trend\nup to 4th unit of apple but it is positive.<\/p>\n\n\n\n<p>(ii) MU is zero from the 5th unit\nof apple and it is the satiety point. Consumer should not consume after this\npoint.<\/p>\n\n\n\n<p>(iii) MU becomes negative with\nthe consumption of 6th unit of apple.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"causes-of-law-of-diminishing-marginal-utility\"><span class=\"ez-toc-section\" id=\"CAUSES_OF_LAW_OF_DIMINISHING_MARGINAL_UTILITY\"><\/span><strong>CAUSES OF LAW OF DIMINISHING MARGINAL UTILITY<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>(i) Satiety of a Want:<\/strong><\/p>\n\n\n\n<p>Human\nwants are unlimited and the resources are scarce with alternative uses. A\nparticular want can be satisfied on a particular point of time. When a consumer\nconsumes different units of a commodity on continuous basis the additional\nutility derived by him goes on declining and thereafter he gets zero and even\nnegative utility. When he gets zero utility it means a saturation point has\nreached and after that point he would like to consume additional unit of that\ncommodity. Hence, the law of diminishing utility will operate.<\/p>\n\n\n\n<p><strong>(ii) Intensity of Want Declines:<\/strong><\/p>\n\n\n\n<p>Utility of a commodity depends\nnot only on the want satisfying power but also on the intensity of the want. As\na consumer goes on consuming additional units of a commodity the intensity of\nthis want goes down and consequently the subsequent utility goes on declining.<\/p>\n\n\n\n<p><strong>(iii) No Perfect Substitutes of Goods:<\/strong><\/p>\n\n\n\n<p>There are substitute goods but\nthey can be substituted to some extent only and there is not perfect substitute\nof goods. For example, bread and butter are consumed in a ratio and any\nimbalance in the ratio of the two will give you diminishing marginal utility.<\/p>\n\n\n\n<p><strong>(iv) Nature of Human Behaviour:<\/strong><\/p>\n\n\n\n<p>It is the nature of human\nbehaviour that a consumer will consume more of those goods which he has not\nconsumed and less of those goods he has already consumed. Such nature of human\nbehaviour is the cause of operating the law.<\/p>\n\n\n\n<p><strong>(v) Variety of Uses:<\/strong><\/p>\n\n\n\n<p>There are several commodities\nhaving a variety of uses or alternative uses in our daily life. The use of a\ncommodity depends on the basis of priority for a particular use. For example,\nuse of electricity depends upon the priority of a particular use. As we move\nfrom more important use of a commodity to less use of it the marginal utility\nof that commodity will decline.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"exceptions-of-law-of-diminishing-marginal-utility\"><span class=\"ez-toc-section\" id=\"EXCEPTIONS_OF_LAW_OF_DIMINISHING_MARGINAL_UTILITY\"><\/span><strong>EXCEPTIONS OF LAW OF DIMINISHING MARGINAL UTILITY<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The\nlaw of diminishing marginal utility operates only when other things remain same\nas pointed by Prof. Alfred Marshall. There are some exceptions or limitations\nto the law of diminishing utility which are as\nfollows:<\/p>\n\n\n\n<p><strong>DISSIMILAR UNITS<\/strong><\/p>\n\n\n\n<p>This law is applicable for\nhomogenous unit only, i.e. only if all units of a commodity consumed are\nsimilar in length, breadth, shape and size. If there is a change in such\nfactors, the utility obtained from it can be increased. For example: If the 2<sup>nd<\/sup>&nbsp;orange is much larger than the 1<sup>st<\/sup>&nbsp;one, it will yield more satisfaction than the\n1<sup>st<\/sup>.<\/p>\n\n\n\n<p><strong>UNREASONABLE QUANTITY<\/strong><\/p>\n\n\n\n<p>The quantity of the commodity a\nconsumer consumes should be reasonable. If the units of consumption are too\nsmall, then every successive unit of consumption may give higher utility to the\nconsumer. For example: If a person is given water by a spoon when he is very\nthirsty, each additional spoonful will give him more satisfaction.<\/p>\n\n\n\n<p><strong>NOT A SUITABLE TIME PERIOD<\/strong><\/p>\n\n\n\n<p>There\nshould not be very long gap between the consumption of different units of the\ncommodity. If there is time lag between the consumption of different units,\nthen this law may not hold good. For example: If a man has lunch at 10 a.m. and\ndinner at 8 p.m. and eats nothing in between, the dinner will possibly yield\neven more satisfaction than the lunch, i.e. his marginal utility will not\ndiminish.<\/p>\n\n\n\n<p><strong>CHANGE IN TASTE AND FASHION OF\nTHE CONSUMER<\/strong><\/p>\n\n\n\n<p>The\nlaw of diminishing marginal utility will be applicable only if the consumer is\nnot supposed to change taste and fashion of the commodity whatever he\/she was\nusing previously.<\/p>\n\n\n\n<p><strong>ABNORMAL PERSON<\/strong><\/p>\n\n\n\n<p>The\nlaw of diminishing marginal utility is applicable for normal person only.\nAbnormal persons such as drunkards and druggist are not associated with the\nlaw.<\/p>\n\n\n\n<p><strong>CHANGE IN INCOME OF THE CONSUMER<\/strong><\/p>\n\n\n\n<p>To\nhold the law good, there should not be any change in the income of the\nconsumer. If the income of the consumer increases, he will consume more and\nmore units of a commodity which he prefers. As a result, utility can be\nincreased rather than decreased.<\/p>\n\n\n\n<p><strong>DURABLE AND VALUABLE GOODS<\/strong><\/p>\n\n\n\n<p>The\nlaw is not applicable in case of durable goods as well as valuable goods such\nas buildings, vehicles, gems, gold, etc.<\/p>\n\n\n\n<p><strong>CONSUMPTION OF VERY SMALL UNITS\nOF THE COMMODITY<\/strong><\/p>\n\n\n\n<p>The law of diminishing marginal\nutility does not hold good when the units of consumption of the commodity are\nvery small in size and quantity. For example, if a thirsty person is given\nwater in small drops in place of a glass of water the law does not operate.<\/p>\n\n\n\n<p><strong>RARE COMMODITIES, MONUMENTS AND ANTIQUES<\/strong><\/p>\n\n\n\n<p>The law is not applicable in\nthose cases where people collect rare commodities, monuments, antiques, old\ncoins, documents, stamps, etc. For those things which are collected as a hobby\nthe marginal utility will increase instead of decline in it.<\/p>\n\n\n\n<p><strong>CLASSICAL MUSIC, GAZALS, POEMS, ETC.<\/strong><\/p>\n\n\n\n<p>The law does not apply in case of\nclassical music, gazals, poems, etc. The audience will enjoy more by listening\nsuch music, gazals and poems and the law will not operate.<\/p>\n\n\n\n<p><strong>COMPLEMENTARY GOODS<\/strong><\/p>\n\n\n\n<p>The law does not apply to\ncomplementary goods as they are jointly demanded to satisfy a want of the consumer.\nFor example, fountain pen and ink are jointly demanded and the law will not\napply because it applies to single commodity only.<\/p>\n\n\n\n<p><strong>MISER MEN<\/strong><\/p>\n\n\n\n<p>The law does not apply to miser\nmen because their aim is to accumulate more and more of wealth or money. The\nadditional units of money collected by them will give more satisfaction.<\/p>\n\n\n\n<p><strong>ALCOHOLIC DRINKS<\/strong><\/p>\n\n\n\n<p>The law does not apply to\nalcoholic drinks. A drunkard takes additional pegs of wine and his satisfaction\ngoes on increasing. Hence the marginal utility from additional peg will\nincrease.<\/p>\n\n\n\n<p><strong>INCREASE IN THE NUMBER OF USERS OR CONSUMERS<\/strong><\/p>\n\n\n\n<p>The law will not apply to those\ngoods and services whose consumers\u2019 or users\u2019 number is increasing. For\nexample, the numbers of telephone connections are increasing day-by-day and the\nutility is increasing instead of decreasing in practical life.<\/p>\n\n\n\n<p><strong>PERSONAL HOBBIES<\/strong><\/p>\n\n\n\n<p>The law does not apply to\npersonal hobbies. For example, people have hobbies collecting old coins, old\nphotos, old stamps and sea-shells. In such cases additional collection of these\nthings will give them more satisfaction and the law will not operate.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"importance-of-law-of-diminishing-marginal-utility\"><span class=\"ez-toc-section\" id=\"IMPORTANCE_OF_LAW_OF_DIMINISHING_MARGINAL_UTILITY\"><\/span><strong>IMPORTANCE OF LAW OF DIMINISHING MARGINAL&nbsp; UTILITY<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The\nlaw of diminishing utility has great practical importance in economics. The law\nof demand, the theory of consumer\u2019s surplus, and the equilibrium in the\ndistribution of expenditure are derived from the law of diminishing marginal\nutility.<\/p>\n\n\n\n<p>&nbsp;<strong>The importance of the law can be classified into two categories as\ngiven below:<\/strong><\/p>\n\n\n\n<p>A. Theoretical importance.<\/p>\n\n\n\n<p>B. Practical importance.<\/p>\n\n\n\n<p><strong>A. Theoretical Importance of the Law:<\/strong><\/p>\n\n\n\n<p>The law of diminishing marginal\nutility has theoretical importance in the study of economic analysis.<\/p>\n\n\n\n<p><strong>Several economic laws have been propounded or\nare based on this law as given below:<\/strong><\/p>\n\n\n\n<p><strong>(i) Law of Demand:<\/strong><\/p>\n\n\n\n<p>The law of demand is based on the\nlaw of diminishing marginal utility. As a consumer consumes additional units of\na commodity the marginal utility declines. He can purchase more quantum of that\ncommodity if the price charged is low. Contrary to it, by consuming less units\nthe utility derived by him will be more and he is ready to pay even high price for\nthe units of that commodity.<\/p>\n\n\n\n<p><strong>(ii) Law of Equi-Marginal Utility:<\/strong><\/p>\n\n\n\n<p>The law of equi-marginal utility\nis also based on this law. A consumer can maximise his satisfaction or utility\nwhen the marginal utilities of different units of different commodities are equalised.<\/p>\n\n\n\n<p><strong>(iii) Consumer\u2019s Surplus:<\/strong><\/p>\n\n\n\n<p>The concept of consumer\u2019s surplus\nis also based on the law of diminishing marginal utility. A consumer cannot pay\nmore price than the marginal utility he is deriving from additional unit of all\ncommodities. The additional utility he derives is greater than the previous one\nand the difference between the two is consumer\u2019s surplus.<\/p>\n\n\n\n<p><strong>(iv) Theory of Pricing:<\/strong><\/p>\n\n\n\n<p>With the increase in the surplus\nof a commodity the marginal utility of that commodity will decline. The\nexchange value of the commodity will also decline. This law is the basis for\nthe theory of pricing of various goods and services in the economy.<\/p>\n\n\n\n<p><strong>B. Practical Importance of the Law:<\/strong><\/p>\n\n\n\n<p>The law of diminishing marginal\nutility has practical importance in our life.<\/p>\n\n\n\n<p><strong>Practical importance of the law is discussed\nas given below:<\/strong><\/p>\n\n\n\n<p><strong>(i) Basis of Production:<\/strong><\/p>\n\n\n\n<p>The law is the basis of\nproduction and on account of this law a variety of goods and services are\nproduced and consumed in the economy. As the supply of a commodity increases\nits utility will decline and consequently, it will adversely affect the profit\nof a producer. In such a situation producer will produce those goods which are\ndemanded more.<\/p>\n\n\n\n<p>As consumer derives zero or\nnegative marginal utility from the goods he will stop the consumption of such\ngoods and divert his attention to consume those goods having more utility. It\nwill encourage producers to produce more because of profitable venture.<\/p>\n\n\n\n<p><strong>(ii) Importance in Public Finance:<\/strong><\/p>\n\n\n\n<p>The law has practical importance\nin the field of public finance. Progressive rate of taxation is the basis of\nmodern taxation system which collects more revenue from the rich sections of\nsociety as the marginal utility of money for these people is less. Contrary to\nit, poor people have paucity of money and the marginal utility of money to\nthese people is high and they are not taxed by the government and economic\nassistance to these persons is given by the government.<\/p>\n\n\n\n<p><strong>(iii) Basis of Socialist System of Wealth\nDistribution:<\/strong><\/p>\n\n\n\n<p>The law of diminishing marginal\nutility also provides the basis for the distribution of wealth in a socialist\neconomy. Wealth is transferred from rich to the poor so the marginal utility of\nmoney will increase which is low for rich people.<\/p>\n\n\n\n<p><strong>(iv) Value in Use and Value in Exchange is\nExplained:<\/strong><\/p>\n\n\n\n<p>By the law, value in use in case\nof air, water, etc., is greater than the value in exchange of diamond, and\nother valuables. Water and air are in plenty and on account of it their\nmarginal utility is low and the value in exchange is also low. Contrary to it,\ndiamond and other valuables are scarce and their marginal utility is high and\non account of its value in exchange is also high.<\/p>\n\n\n\n<p>Thus, we can say that the law of\ndiminishing marginal utility is a universal law and it operates not only in\nconsumption goods but the various sectors of the economy are also affected by\nthe law.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"criticisms-limitations-of-law-of-diminishing-marginal-utility\"><span class=\"ez-toc-section\" id=\"CRITICISMS_LIMITATIONS_OF_LAW_OF_DIMINISHING_MARGINAL_UTILITY\"><\/span><strong>CRITICISMS \/LIMITATIONS OF LAW OF DIMINISHING MARGINAL UTILITY<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>Conditions are unrealistic<\/strong>: In the\nassumptions to this law we have seen the different conditions that are required\nfor this law to hold good. This included the assumptions like uniform nature of\nunits, continuous consumption, and satisfaction of a single want and so on. In\npractical terms it is not that easy to meet these conditions and hence these\ncould be called as impractical in nature. So this could be said as the\nlimitation to the law of diminishing marginal utility.<\/p>\n\n\n\n<p><strong>Cardinal measurement<\/strong><strong>:&nbsp;<\/strong>Wehave\nthe law with respect to the utility schedule. It simply means that we have\nstated the law in terms of cardinal measurement of utility. So for this law to\nhold good it is assumed that utility can be measured in cardinal numbers and\nthese are used to show&nbsp;&nbsp;how with increase in the intake leads to fall\nin the marginal utility. Utils are used to show the utility table. We have also\nseen that utility is subjective in nature as the product may provide different\nlevels of utility to the different users. Hence this assumption of cardinal\nmeasurement of quantification of utility may not be that compelling.<\/p>\n\n\n\n<p><strong>Cannot be applied to indivisible goods<\/strong><strong>: <\/strong>This law assumes the divisibility nature of the commodity\nthereby rendering its inapplicability to products that are indivisible in\nnature. Think of products like washing machine, four-wheeler, television set\nand other such products that are not divisible in nature. We cannot simply talk\nof utility of such goods with increase in stock because these are not brought\nin successive units thereby making the law inapplicable to such products.<\/p>\n\n\n\n<p><strong>Constant marginal utility of money<\/strong><strong>: <\/strong>The constant marginal utility of money is assumed for the\npurpose of this law. This assumption too seems to be an unlikely one since the\nutility of money may not remain unchanged.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"conclusion\"><span class=\"ez-toc-section\" id=\"CONCLUSION\"><\/span><strong>CONCLUSION<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The law of diminishing marginal utility is a very widely studied concept in the world of economics. It helps us understand why a consumer is less and less satisfied with the consumption of every additional unit of a good. The law is based on the ordinal theory of utility and requires certain assumptions to hold true. However, there are exceptions to the law as it might not hold true in some cases.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/demand\/\">Theory of Demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-demand\/\">Law of Demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/demand-function\/\">Demand Function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/exceptions-of-law-of-demand\/\">Exceptions of law of demand<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/elasticity-of-demand\/\">Elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/change-in-demand\/\">Change in demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/price-elasticity-of-demand\/\">Price elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-law-of-demand-and-elasticity-of-demand\/\">Law of demand Vs Elasticity of demand<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/factors-affecting-price-elasticity-of-demand\/\">Factors affecting price elasticity of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/production-function\/\">Production function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-short-run-long-run-production-function\/\">Short run vs long run production function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-variable-proportions\/\">Law of variable proportions<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/types-of-demand\/\">Types of demand<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/managerial-economics\/\">Managerial economics<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/characteristics-of-managerial-economics\/\">Characteristics of managerial economics<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/scope-of-managerial-economics\/\">Scope of managerial economics<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/utility-analysis\/\">Utility analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/\">Law of diminishing marginal utility<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-equi-marginal-utility\/\">Law of equi marginal utility<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/consumer-equilibrium\/\">Consumers Equilibrium<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/indifference-curve-analysis\/\">Indifference curve analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/consumer-equilibrium-using-indifference-curve-analysis\/\">Consumer equilibrium using indifference curve analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/relationship-between-tp-ap-and-mp\/\">Relationship between TP, AP and MP<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-increasing-returns\/\">Law of increasing returns<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/law-of-diminishing-returns\/\">Law of diminishing returns<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/law-of-constant-returns\/\">Law of constant returns<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/returns-to-scale\/\">Returns to Scale<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/economies-and-diseconomies-of-scale\/\">Economies and diseconomies of scale<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/concept-of-costs\/\">Concept of costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/relationship-between-ac-and-mc\/\">Relationship between AC and MC<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/traditional-theory-of-cost\/\">Traditional theory of costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/modern-theory-of-cost\/\">Modern theory of costs<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/explicit-vs-implicit-costs\/\">Explicit vs Implicit costs<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/revenue\/\">Revenue<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perfect-competition\/\">Perfect competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopoly-meaning\/\">Monopoly<\/a>&nbsp;<\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/price-discrimination\/\">Price discrimination<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-perfect-competition-and-monopoly\/\">Difference between perfect competition and monopoly<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perfect-and-monopolistic-competition\/\">Perfect Vs Monopolistic competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopoly-and-monopolistic-competition\/\">Monopoly and monopolistic competition<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/product-differentiation-strategy\/\">Product differentiation strategy<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/monopolistic-competition\/\">Monopolistic competition<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/national-income-in-india\/\">National Income in India<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/measurement-of-national-income\/\">Measurement of national income in India<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/consumption-function\/\">Consumption function<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/keynesian-psychological-law-of-consumption\/\">Keynes Psychological law of consumption<\/a><\/td><td><\/td><td><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/www.linkedin.com\/in\/kajal-mahajan-7549b2197\/\" target=\"_blank\" rel=\"noreferrer noopener\">CONNECT ON LINKEDIN<\/a><\/div>\n<\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"266\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1024x266.jpg\" alt=\"LAW OF DIMINISHING MARGINAL UTILITY\" class=\"wp-image-787\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1024x266.jpg 1024w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-300x78.jpg 300w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-768x199.jpg 768w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize-1536x398.jpg 1536w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-Presentation-resize.jpg 1920w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>LAW OF DIMINISHING MARGINAL UTILITY<\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>LAW OF DIMINISHING MARGINAL UTILITY The Law of Diminishing Marginal Utility states that the amount of satisfaction provided by the consumption of every additional unit of a good decrease as we increase the consumption of that good. Marginal Utility is the change in the utility derived from the consumption of an additional unit of a&#8230;<\/p>\n<p class=\"more-link-wrap\"><a href=\"https:\/\/commerceiets.com\/law-of-diminishing-marginal-utility\/\" class=\"more-link\">Read More<span class=\"screen-reader-text\"> &ldquo;LAW OF DIMINISHING MARGINAL UTILITY&rdquo;<\/span> &raquo;<\/a><\/p>\n","protected":false},"author":2,"featured_media":3567,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[113,92],"tags":[],"class_list":["post-3566","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-managerial-economics","category-micro-economics"],"_links":{"self":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3566","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/comments?post=3566"}],"version-history":[{"count":0,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3566\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media\/3567"}],"wp:attachment":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media?parent=3566"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/categories?post=3566"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/tags?post=3566"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}