There are two basic approaches to the study of consumer demand theory. The first approach is the utility approach. It involves the use of measurable (cardinal) utility to study consumer behaviour. Marshall is the chief exponent of the utility approach to the theory of demand. It is known as cardinal utility analysis or marginal utility analysis or Marshallian utility analysis. The second approach is the indifference curve approach which uses the idea of comparable utility (ordinal utility). J.R.Hicks and R.G.D.Allen introduced the indifference curve approach.
In the ordinary language, 'utility' means 'usefulness'. In Economics, utility is defined as the power of a commodity or a service to satisfy a human want.
Utility is a subjective or psychological concept. The same commodity or service gives different utilities to different people. For a vegetarian, mutton has no utility. Warm clothes have little utility for the people in hot countries. So utility depends on the consumer and his need for the commodity.
Total Utility refers to the sum of utilities of all units of a commodity consumed. For example, if a consumer consumes ten biscuits, then the total utility is the sum of satisfaction of consuming all the ten biscuits.
Marginal Utility is the addition made to the total utility by consuming one more unit of a commodity. For example, if a consumer consumes 10 biscuits, the marginal utility is the utility derived from the 10th unit. It is nothing but the total utility of 10 biscuits minus the total utility of 9 biscuits.
MUn = TUn - TU n-1
MUn = Marginal Utility of 'nth ' commodity. TUn = Total Utility of n units.
TU n-1 = Total Utility of n-1 units.
Marginal Utility Total Utility
(i) Declines Increases
(ii) Reaches zero Reaches maximum
(iii) Becomes negative Declines
The law of diminishing marginal utility explains an ordinary experience of a consumer. If a consumer takes more and more units of a commodity, the additional utility he derives from an extra unit of the commodity goes on falling. Thus, according to this law, the marginal utility decreases with the increase in the consumption of a commodity. When marginal utility decreases, the total utility increases at a diminishing rate.
Gossen, Bentham, Jevons, Karl Menger contributed initially for the development of these ideas. But Alfred Marshall perfected these ideas and made it as a law. This Law is also known as Gossen's I Law.
According to Marshall, 'The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has'.