Explain the law of diminishing marginal utility with the help of a total utility schedule.
Explain the Law of Diminishing Marginal Utility
Answer in detail.
Explain the law of Diminishing Marginal Utility with its assumptions.
Law of diminishing marginal utility means that as more units of a good are consumed, the marginal utility received from the consumption of every additional unit of the good declines.
Assumptions of the law of diminishing marginal utility:
i. Standard units of a good: Only standard units of a good are consumed such as one glass of water and one teaspoon of honey.
ii. Continuous consumption of a good: If the consumption good is continuous on the same day, then the utility of that particular good can be measured. However, if the good is consumed on different days (one cup of milk on Day 1 and one cup of milk on Day 2), then the utility will be measured as completely new for consumption on Day 2.
iii. Rationality: This law is suitable only to the rational consumer who is able to respond and take decisions for consumption of goods in the market.
iv. Taste and preferences: This law is suitable only if the consumer’s taste and preferences remain constant.
v. Homogenous units: This law is suitable only to homogenous goods in terms of taste, colour, shape and size. For example, utility can be measured only if a consumer consumes a cup of milk for the second time after an hour. However, utility cannot be measured if the consumer consumes a cup of milk followed by a cup of tea after an hour.
|Units of Commodity X||Total Utility (TU) (utils)||
Marginal Utility (MU)
MUn = TUn − TUn-1
|1||50||50 - 0 = 50|
|2||80||80 - 50 = 30|
|3||100||100 - 80 = 20|
|4||110||110 - 100 = 10|
|5||110||110 - 110 = 0|
|6||105||105 - 110 = -5|
In the given schedule, marginal utility of the second unit is 30 utils and it decreases to 20 and 10 for the consumption of the 3rd and 4th unit of the marginal utility, respectively. It becomes zero for the consumption of the 5th unit, and it becomes negative for the 6th unit. Hence, the marginal utility will decrease with additional units of consumption.