The quality of a good or
service to satisfy human want is called utility. It has no physical existence. It
is concerned with the consumer mind and is a relative concept. Utility cannot
be measured as weight or height. It is merely estimated for expressing
satisfaction. Utility differs from person to person. For example, pizza
satisfies person A want therefore pizza has utility for A but at the same time
pizza has no utility for B because B does not like eating pizza.
Utility has the following
kinds.
Marginal utility: It is derived from the additional unit of
consumption.
Total utility: It is sum of marginal utilities.
Average utility: It is division of total utility by consumption of
total units.
Law of Diminishing Marginal Utility
The law of diminishing
marginal utility states the additional utility of a commodity decreases as its
consumption increases, while other things remain the same. It means every additional unit that is
consumed has a lower marginal utility than the unit before consumed. At a
certain point the marginal utility can even become negative. The explanation of
the law is given below.
Explanation
Suppose, you are very thirsty.
You go the market and buy one bottle of water. The first glass of water will be
a great satisfaction for you. The second glass of water will give you less
satisfaction than the first one, and the third one less than the second one and
so on. If you are not ready to drink fifth glass of water, and you drink, thus
the utility of the fifth glass will be zero. It is the position of maximum
satisfaction. If you take sixth glass of water, the marginal utility will
become negative. The law of diminishing
marginal utility can be further illustrated with the help of schedule and
diagram.
We can see from the above schedule
that marginal utility keeps on diminishing with every additional glass of
water. The consumer gets 12 units of utility from first glass of water. When he
drinks second glass of water, his marginal utility goes down to 9 units, and it
continuously diminishing by taking further glass of water. This process showing
the law of diminishing marginal utility.
In the above diagram, units of
utility are measured on y-axis and units of commodity are measured on x-axis.
MU is the marginal utility curve. The marginal utility of fifth consumption of
a commodity (glass of water) is zero which is satiety point. While the marginal
utility of sixth glass of water is negative which is (-3). We can see that MU
curve is sloping downward at the consumption of every glass of water. The downward
slop of the MU curve is representing the law of diminishing marginal
utility.
Law of demand
Exceptions or Limitations
There are some factors on
which the law of diminishing marginal utility does not apply. They include:
- Desire for money: The law is not applicable to money because generally when a person gets more money he gets more satisfaction and pleasure. So, the marginal utility of money does not become zero.
- Collection of rare goods: The law is not applicable in case of rare objects because when a person collects rare objects like paintings, old coins, postage stamps, jewels or diamonds, he gets more utility.
- Use of intoxicants: The law will not be effective in case of using intoxicants like alcohol, opium, or drug.
Assumptions or Conditions
Following are the assumptions
of the law:
- All units of a commodity must be same in quality and quantity.
- 2. There should be continuity in consumption of the commodity. If the interval between units of consumption is too long, the law will not work.
- 3. There should be no change in taste, habit, fashion, and income of the consumer.
- 4. Units of commodity must be of suitable size. For instance, giving water to a thirsty person by spoon will increase instead of diminishing utility of the subsequent spoon of water.
- 5. There should be no change in price of the good and its substitute.
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