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State and explain the law of Diminishing Marginal Utility and explain its exceptions. - Economics

Long Answer

State and explain the law of Diminishing Marginal Utility and explain its exceptions.

Answer in detail:

Explain the law of diminishing marginal utility and its exceptions

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Solution

Law of Diminishing Marginal Utility (DMU) explains economic behaviour of a rational consumer. Prof. Gossen first proposed this law in 1854. Prof. Alfred Marshall later on discussed the law in his book ‘Principles of Economics’ in 1890. The law of DMU is universal in character. It is based on the common consumer behaviour that the utility derived diminishes with the reduction in intensity of want.

1. 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.”

Explanation: Marginal Utility that any consumer derives from the consumption of successive units of a particular commodity goes on diminishing as his/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.

2. Schedule:

The law of DMU can be explained with the following schedule:

No. of Units MU (measured in utils)
1 10
2 8
3 6
4 4
5 2
6 0
7 2

Explanation:

  1. When a person consumes the first unit, the Marginal Utility (MU) is 10.
  2. As the consumption increases, MU keeps decreasing from 10 to 8 to 4 to 2. This proves that as the consumption increases, MU goes on declining. 
  3. Further, when the fifth unit is consumed, the MU becomes zero. This is a point of maximum satisfaction or the point of satiety.
  4. When a person consumes the sixth unit, the MU becomes negative i.e. –2. This indicates negative utility or disutility.

3. Diagram:

Explanation:

  1. In diagram, X-axis represents no. of units consumed while Y axis represents Marginal Utility. 
  2. 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.
  3. MU curve is a downward sloping curve from left to right. It indicates that increase in the consumption of a commodity leads to decrease in the marginal utility of that commodity. 
  4. 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.

4. Exceptions:

The following are exceptions to the law of Diminishing Marginal Utility:

  1. Hobbies:- A person having hobby of collecting old coins, artefacts, paintings, etc. gets more pleasure when he collects more of it. In other words, the MU keeps on increasing with additions to his collection. Hence, it is an exception to the law. However, the assumption of homogeneity is violated here as a person does not collect the same coins or artefacts. Further, he does not collect them in continuous succession. So, the assumption of continuity is also violated. Hence, it is not a real exception.
  2. Miser:- A miser is a person who wants to accumulate more and more wealth and does not want to spend it. Therefore, MU of money increases for a miser as his stock of money keeps on increasing. It contradicts the law of DMU. However, even in this case, the assumption of rationality is violated and it cannot be considered to be a real exception.
  3. Addiction:- MU of alcohol keeps increasing for a drunkard as he consumes more of it. The alcoholism increases with every additional unit consumed. This applies to all addictions. However, in case of all addicts, the assumption of rationality is violated and therefore, it cannot be considered to be a real exception.
  4. Power:- A person who has power or influence always wants more of it. The MU of power keeps increasing as the person continues to get more power. The greed for power does not end. Therefore, it can be said to be an exception to the law. Again, it is not a real exception as the assumption of rationality is violated.
  5. Money:- MU of money never becomes zero. In fact, the MU of money keeps on increasing as stock of money increases. However, money cannot be considered to be real exception for the following reasons: i. Money does not have a single use and therefore it violates one of the basic assumptions of the law. ii. After a certain point of time, the MU of money for a rich person reduces as his stock of money (bank balance) keeps increasing. According to various economists, the law of DMU is applicable to money. E.g.: MU of money is more to a poor person than to a rich person.
Concept: Diminishing Marginal Utility
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APPEARS IN

Balbharati Economics 12th Standard HSC Maharashtra State Board
Chapter 2 Utility Analysis
Exercise | Q 5. (1) | Page 16
Micheal Vaz Economics HSC 12th Standard Maharashtra State Board
Chapter 2 Consumer's Behavior
Exercise | Q 2 | Page 17
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