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Law of Diminishing Marginal Utility

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Law of Diminishing Marginal Utility :

Introduction :

This law was first proposed by Prof. Gossen but was discussed in detail by Prof. Alfred Marshall in his book ‘Principles of Economics’ published in 1890.
The law of diminishing marginal utility is universal in character. 

Law of diminishing marginal utility was first formulated by Herman Gossen (1854) who stated:
“The magnitude of one and the same satisfaction, when we continue to enjoy it without interruption continually decreases until satisfaction is reached.”

Marshall (1920, 1961) continued this line of thinking, giving a more technical definition. He stated that 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. 

Statement of the Law :

According to Prof. Alfred Marshall, “Other things remaining constant, the additional benefit which a person derives from a given increase in his stock of a thing, diminishes with every increase in the stock that he already has.”
In other words, marginal utility that any consumer derives from successive units of a particular commodity goes on diminishing as his or her total consumption of that commodity increases. In short, the more of a thing you have, the less you want to have more of it.

Some uses of diminishing marginal utility:

Basis for Progressive Taxation:

  • The law of diminishing marginal utility is one of the fundamental principles in public finance. The law serves as the basis for progressive taxation.

  • Adam Smith explained canons of taxation in his book ‘Wealth of Nations’. One of the canons of taxation is ‘Ability to Pay’. This means that taxes should be imposed according to the ability of people to pay.

  • According to Prof. Pigou, the marginal utility of money for a poor person is higher than that for a rich person. This is so, because a poor person possesses little money; therefore, the utility derived from each unit of money is huge. This implies that rich people are able to pay more as taxes than poor people are.

  • This concept leads to progressive taxation system, which imposes heavier tax burden on the rich. This is one of the very important practical applications of the law of diminishing marginal utility.

Water – Diamond Paradox:

  • The principle of diminishing marginal utility is beneficial to understand the difference between value-in-use and value-in-exchange.

  • For instance, let us consider two commodities – water and diamond. Water is essential for our survival (value-in-use) but it is not costly (no or little value-in-exchange). On the contrary, diamonds are useful although not a necessity (no value-in-use) but they are very costly (high value-in-exchange).

  • Water is abundant but diamonds are scarce and hence they possess a very high marginal utility.

  • This scenario is often referred to as water - diamond paradox.

Table below explains the Law of Diminishing Marginal Utility.

The table shows that marginal utility keeps on diminishing with increase in consumption, further it becomes zero and then negative.

Explanation of the Diagram :

In the above diagram, units of commodity x are measured on X axis and marginal utility is measured on Y axis. Various points of MU are plotted on the graph as per the given schedule. When the locus of all the points is joined, MU
curve is derived.

MU curve slopes downwards from left to right which shows that MU goes on diminishing with every successive increase in the  consumption of a commodity.        When MU becomes zero, MU curve intercepts the X axis. Further consumption of a commodity brings disutility (negative utility) which is shown by the shaded portion in the diagram.

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