Complete information on the Law of Diminishing Marginal Utility (DMU)

The law of diminishing marginal utility states that as the stock of a commodity increases with the consumer, its marginal utility to the consumer decreases. It can eventually fall to zero and become even negative.

The law describes a familiar psychological tendency of the human beings. Marshall says that “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 been discussed above that utility from the last unit of a good under consideration is termed its marginal utility. It has also been specifically noted that this marginal utility depends upon utter intensity of want to be satisfied.

The specific behavior of marginal utility as described by the law of DMU follows from the conventional (and realistic) assumption that the intensity of a given want keeps decreasing if the process of its satisfaction is continued without interruption, i.e., a single want can be fully satisfied provided the consumer consumes a large enough quantity of the relevant good/service.

In other words, during the process of its satisfaction, nothing should happen to increase its intensity. For example, the consumer should not allow an unduly long interval between the consumption of any two units of the good; he should not get news of an unexpected change in his income or the price of the good, etc. It should also be noted that the good to be consumed should be homogeneous. Its successive units should have the same technical specifications. Any change in them can cause a change in the intensity of the want being satisfied and thereby violate the law of DMU.

The rate at which marginal utility of a good falls depends upon several factors and varies from individual to individual as also for the same individual from one situation to the other. This is because, it is generally possible to use several alternative goods or their combination for satisfying a given want and a given good is useful for satisfying several alternative wants. Moreover, as we have seen above, there is no constancy of the intensity of wants.

It is noteworthy that total utility keeps increasing so long as marginal utility is positive. The relationship between total, average and marginal utility measures has been explained and illustrated in the preceding paragraphs.

Exceptions to the Law:

The law of DMU is violated only if one or more of the assumptions upon which it is based get violated. Since utility of a good is related to the mental perception of the consumer regarding the intensity of the want to be satisfied and the capacity of the good to satisfy it, therefore, the law of DMU is violated if for some reason,

(i) the intensity of the want increases, or

(ii) the consumer comes to think that the intensity of his want has increased.

It is for this reason that marginal utility of a good tends to increase if there is an unduly long interval between the consumption of two units of a good. Marginal utility of a good may also increase, if the want of the consumer is intensified by consuming a very small quantity of it (such as, a very little quantity of water given to a very thirsty person). Sometimes the marginal utility of a good increases during the process of its consumption because the consumer comes to know better about it. A typical example of this is a piece of music which may be enjoyed better when listened to more than once.

Uses of the Law of DMU:

The concept of marginal utility of a good and the manner, in which it changes in relation to a change in its stock with a typical consumer, plays a central role in demand analysis.

(I) It is directly linked with the price which the consumer is ready to pay for different quantities of the good under consideration. The analysis is based upon the assumption that the decision of the consumer is guided by his ‘rationality’, that is his economic interest. He buys an additional unit of a good only if its marginal utility is equal to or greater than the price to be paid for it. Given that the law of DMU applies to the good, we are able to derive the law of demand, which states that the quantity demanded of a good is inversely related to its price per unit.

(ii) The relationship between diminishing marginal utility of a good and its price helps us in explaining the determination of its price in the market. It also helps us in explaining paradoxes like water (which is so essential for life) being cheaper than diamonds.

(iii) The law of DMU can be extended to the case where a consumer is faced with the decision to divide his total expenditure over a number of goods. This extension leads to the law of equi-marginal utility.

(iv) Given the law of DMU, economic rationality of the consumer leads us to the conclusion to define and measure consumer’s surplus, which is defined dS, the excess of the maximum price, which is the consumer, is ready to pay for the good over the price, which he actually pays for it.

(v) The law of DMU is highly useful to the authorities also in working out their social welfare programmes. They can take steps by which goods and services are allocated between members of the society in such a way that marginal utility of each good/service tends to be the same for every individual. If a particular good does not satisfy this condition, then its successive units should be transferred from those for whom it has smaller marginal utility to those for whom it has higher marginal utility. For example, marginal utility of a ‘basic necessity’ like nutritious food is expected to be higher for a poor family than for a rich one which has already enough of it. Therefore, if through rationing, taxes, subsidies, or other methods, some of it is transferred from richer families to the poorer ones, total utility of the society as a whole is expected to increase.