Consumers are constantly faced with choices when deciding how to spend their money. They often choose to consume a variety of goods to maximize their overall satisfaction. However, as they consume more and more units of a particular commodity, the utility derived from each additional unit decreases. This is known as the Law of Diminishing Marginal Utility (DMU).
German economist H.H. Gossen first introduced the concept of DMU. The law has universal applicability and applies to all goods and services. The law expresses an important relationship between utility and the quantity consumed of a commodity.
Assumptions of the Law of Diminishing Marginal Utility
The Law of DMU operates under certain specific conditions, which economists call assumptions. These assumptions include:
- Cardinal measurement of utility:
Utility can be measured, and a consumer can express their satisfaction in quantitative terms such as 1, 2, 3, etc. - Monetary measurement of utility:
Utility is measurable in monetary terms. - Consumption of reasonable quantity:
A reasonable quantity of the commodity is consumed, and the appropriate amount of the commodity should be compared to ensure the law’s validity. - Continuous consumption:
Consumption is a continuous process. - No change in quality:
The quality of the commodity consumed is uniform. - Rational consumer:
The consumer is rational and aims to maximize total satisfaction. - Independent utilities:
All the commodities consumed by a consumer are independent of one another. - MU of money remains constant:
The MU of money remains constant. - Fixed income and prices:
The income of the consumer and the prices of the goods they wish to purchase remain constant.
Utility is often measured in units called utils. The DMU is represented graphically by plotting utility on the Y-axis and the quantity consumed of a commodity on the X-axis. As consumption increases, the marginal utility derived from each additional unit of the commodity decreases. The table below illustrates this concept using the example of consuming ice cream.
| Units of Ice Cream | Total Utility (in utils) | Marginal Utility (in utils) |
|---|---|---|
| 1 | 20 | 20 |
| 2 | 36 | 16 |
| 3 | 46 | 10 |
| 4 | 50 | 4 |
| 5 | 50 | 0 (Point of Satiety) |
| 6 | 44 | -6 |
As seen in the table, the marginal utility decreases as the quantity of ice cream consumed increases. The point of satiety occurs when the marginal utility is zero, indicating that the consumer no longer derives any satisfaction from consuming more units of the commodity. Beyond this point, consuming additional units of the commodity results in disutility, indicating a decrease in overall satisfaction.
In conclusion, understanding the Law of Diminishing Marginal Utility is crucial in economics as it plays a vital role in consumer decision-making. The law’s assumptions provide a framework for analyzing consumer behavior and understanding how consumers allocate their resources to maximize their overall satisfaction.