The Law of Diminishing Marginal Utility

The law of diminishing marginal utility was first developed by a German economist Hermann Heinrich Gossen. This law is also known as the first law of Gossen. The law of diminishing marginal utility states that the marginal utility derived from the consumption of every additional unit goes on diminishing, other thing remaining the same.

The law of diminishing marginal utility is based on two important facts :

1. Though human wants are unlimited, each single want is satiable.
2. Commodities are not perfect substitute for each other.

Therefore, as a consumer consumes more and more units of a commodity, intensity of his/her want for the commodity goes on falling and reaches a point where a consumer do not want any more units of the commodity. That is, when saturation point is reached marginal utility of a commodity becomes zero. Thus, as the amount of consumption of a commodity increases, marginal utility decreases. The second fact is that the different commodities are not perfect substitutes for each other. Hence, when an individual consumes more and more units of a commodity, the intensity of his particular want for the commodity diminishes.

Assumptions of the Law of Diminishing Marginal Utility;

1. Consumer should be rational.
2. Utility can be measured in the cardinal number.
3. Marginal utility of money remains constant.
4. All the units of consumption are homogeneous.
5. There is continuous consumption of the commodity i.e, there is no time gap between the successive units of consumption.
6. The units of consumption’s are suitable in size.
7. There is no change in tastes, nature, fashion and habits of the consumer.

Significance of the Law of Diminishing Marginal Utility

The law of diminishing marginal utility is of great importance in economics:

1. Basis of Economic Laws – Several very important laws of economics are based on the law of diminishing marginal utility e.g. the law of demand, consumer’s surplus, elasticity of demand, the law of substitution, etc.
2. Basis of Theory of Taxation – The law of diminishing marginal utility is applicable in the sphere of taxation. As a person’s income increases, the rate of tax rises because the marginal utility of money to him falls with the rise in his income. The principle of progressive taxation is based on this law.
3. Basis of Price Determination – This law also applies to the determination of market price. The price of a commodity falls when its supply increases. It is because with the increase in the stock of a commodity, its marginal utility decreases.
4. Basis for Consumer Expenditure – The law of diminishing marginal utility regulates our daily expenditure. We know that as we go on buying more of a commodity, its marginal utility falls. Having only a limited amount of money at our disposal, we cannot waste it unnecessarily on a large quantity of a particular commodity. Therefore, we stop further purchases at a point where marginal utility equals price.
5. Basis of Distribution of Wealth – According to socialists, the distribution of wealth and national income should be done on the basis of this law. They argued that excessive wealth in the hand of rich is not so useful from the social point of view. The excess wealth should be transferred to the poor. In the hand of poor, it will satisfy needs that are more urgent. It is due to diminishing marginal utility that beyond a certain point, wealth will have less utility of a rich man. If it is transferred to the poor, it will have greater utility.

Exceptions of the Law of Diminishing Marginal Utility

There are various limitations / exceptions of the law of diminishing marginal utility. Major limitations are as follows:

1. Homogeneous Commodity – The law of diminishing marginal utility assumes that there should be single commodity with homogeneous units. All units of the commodity should be of the same same size and quality. If the units are not identical, this law will not be applied.
2. No change in tastes, habits, customs, fashion and income of the consumer – There should not be changed in tastes, habits, customs, fashion and income of the consumer. If the income of a consumer increases, the marginal utility of a certain goods will increase. In such case, increase in consumption may yield greater satisfaction or utility.
3. Continuity – There should be continuity in the consumption of the commodity; otherwise the law of diminishing marginal utility will not apply. Units of the commodity should be consumed in succession at one particular time. If the interval between the various units of consumption is too long, marginal utility may become higher.
4. Suitable size of units – Units of the commodity should be of a suitable size. It must not be too small. For example, giving water to a thirsty man by spoon will increase the utility of the successive spoon of water.
5. Ordinary commodities – Commodities should be of an ordinary types. If the commodities are likes diamonds and jewels or hobby commodities like stamps, coins or paintings, the law of diminishing marginal utility does not apply.
6. Marginal utility of money not constant – Our intensity for money increases as we have more of it. No doubt the marginal utility of money does not become zero, but it definitely falls as a person gets more and more money. The marginal utility of money for a rich is less than a poor man.
7. Rational consumer – The consumer should be an economic man, who acts rationally. This law does  not apply to persons of special nature such as drunkard, druggist etc. Marginal utility of wine for drunkard increases with every peg of drinks.