CONSUMER BEHAVIOUR

LAW OF DIMINISHING MARGINAL UTILITY

INTRODUCTION

In making choices, most people spread their incomes over different kinds of goods. People prefer a variety of
goods because consuming more and more of any one good reduces the marginal satisfaction derived from
further consumption of the same good.

This law expresses an important relationship between utility and the quantity consumed of a commodity.

MEANING

Law of diminishing marginal utility states that as we consume more and more units of a commodity,
the utility derived from each successive unit goes on diminishing.

In other words, we can say

As we consume more units of a commodity, each successive unit consumed gives lesser and
lesser satisfaction, that is marginal utility diminishes. It is termed as the Law of Diminishing
Marginal Utility.

The law further states that when an individual consumes more of a commodity the total utility increases at a
decreasing rate. However, after certain stage, the total utility also starts decreasing and the marginal utility
becomes negative (See Table). This means that the individual does not need the commodity anymore.

LAW OF DIMINISHING MARGINAL UTILITY HAS UNIVERSAL APPLICABILITY AND

APPLIES TO ALL GOODS AND SERVICES.

Also known as “Gossen’s first law of consumption”.

Schedule for Law of Diminishing Marginal Utility:

No of Apples Marginal Total

Consumed Utility Utility
0 0 0
1 20 20
2 15 35
3 10 45
4 05 50
5 00 50
6 -05 45
In the above table, the total utility obtained from the first apple is 20 utils, which keep on increasing until
we reach our saturation point at 5th apple. On the other hand, marginal utility keeps on diminishing with
every additional apple consumed. When we consumed the 6 th apple, we have gone over the limit. Hence,
the marginal utility is negative and the total utility falls.

Assumptions:

1.) Cardinal measurement of utility: it is assumed that utility can be measured and a consumer can
express his satisfaction in quantitative terms such as 1,2,3 etc.
2.) Consumption of reasonable quantity: it is assumed that a reasonable quantity of the commodity
is consumed. For example we should compare MU of glassful of water and not of spoonful.
3.) Continuous consumption: it is assumed that consumption is a continuous process. For example,
if one ice-cream is consumed in the morning and another in the evening, then the second ice-
cream may provide equal or higher satisfaction as compared to the first one.
4.) No change in quality: quality of the commodity consumed is assumed to be uniform. A second
cup of ice-cream with nuts and toppings may give more satisfaction than the first one, if the first
ice-cream was without nuts and toppings.
5.) Independent utilities: MU of one commodity has no relation with MU of another commodity.
6.) Fixed income and prices: it is assumed that income of the consumer and prices of the goods
remains constant.
7.) MU of money remains constant: as we spend more and more money, the MU of the money
increases. But, such an increase in MU of money is ignored and it is assumed that MU of money
remains constant.
Exceptions: Following are the exceptions for this law:
 Desire for money.
 Desire for knowledge.
 Collection of rare objects.
 Hobbies and Rare Things
 Liquor and Music
 Things of Display

Importance:
 Basis of Law of Demand
 Basis of Consumption Expenditure
 The basis of Progressive Taxation