The Law of Diminishing Marginal Utility

THE LAW OF DIMINISHING MARGINAL UTILITY

The law of diminishing marginal utility states that as the quantity consumed of a commodity increases, the utility derived from each successive unit decreases, consumption of all other commodities remaining the same.

Assumptions of diminishing marginal utility

i.  The utility analysis is based on the cardinal co ncept which assumes that utility is measurable and additive like weights and lengths of goods.

ii. Utility is measurable in terms of money.

iii. The marginal utility of money is assumed to be constant.

iv. The consumer is rational who measures, calculates, chooses and compares the utilities of different units of the various commodities and aims at the maximization of utility.

v. He has full knowledge of the availability of commodities and their technical qualities.

vi.           He possesses perfect knowledge of the choices of commodities open to him and his choices are certain.

vii.He knows the exact prices of various commodities and their utilities are not influenced b y variations in their price.

viii.There are no substitutes.

This is explained with the help of a diagram.

X axis -Quantity demanded

Y axis -Utility

TU-Total Utility

DMU-Diminishing Marginal Utility

Explanation:

i.  With the increases in the number of units consumed per unit of time, TU increases but at a diminishing rate.

ii. The downward sloping Mu curve shows that marginal utility goes on decreasing as consumption increases.

iii. At 4 units consumed, the TU reaches its maximum level the point of saturation and mu becomes zero.

beyond this MU become negative and  TU begins to decline .