Law of diminishing marginal
utility
Introduction-Law of diminishing marginal utility
 Wants or desires are one of the distinguishing
features of all living creatures but are pronounced
most staunchly by human beings.
 Our life is geared towards satisfaction of wants.
Characteristics of wants
Wants have the following characteristics:
i) wants are unlimited in number and variety
ii) particular want is desirable
iii) wants are complementary
iv) wants are competitive
v) wants are alternative
vi) wants are recurrent and
vii) wants may be unconscious also
Utility
Wants are satisfied by consuming goods and
services. The want satisfying power of goods
and services is called utility.
There are four forms of utility:
Form utility
If the utility of a good changes when its
physical form is changed, it is called form
utility.
The utility of wood, for example, increases
when its physical form is changed into finished
goods such as Tables and Chairs.
Place utility
When the utility changes when a good is
moved from one place to another, then it is
called place utility.
Transport of apples from Himachal Pradesh,
for example, to South India fetches a higher
price as its utility increases.
Time utility
When the utility of a good changes due to
time, it is known as time utility.
Many food products are produced during
seasons but if they are preserved and marked
during off season period, their utility, reflected
by price, increases
Possession Utility
If the utility of a good changes when owned by
a popular person then it is called possession
utility.
 An example is the pen or spectacle used by
Mahatma Gandhi.
Law of diminishing marginal utility
 We live in the pursuit of satisfying our wants.
However, the process of satisfying wants is
influenced by the law of diminishing marginal
utility.
 When a person consumes a good successively, the
utility derived from the consumption of each
successive unit of the good goes on decreasing,
becomes zero and then turns negative which
forces consumption of the good to stop.
Alfred Marshall defined the law as follows:
“The additional benefit which a person derives
from a given increase of his stock of a thing
diminishes with every increase in stock that he
already has”.
The law operates for two reasons:
i) Each want to satiable; and
ii) Goods are imperfect substitutes for one
another and they tend to be consumed in
appropriate proportions.
The law could be explained using an example:
Consumption of Tomato
The above Table shows how the marginal
utility decreases with consumption of each
successive unit of tomato. It could be shown in
Figure 1 wherein the law is explicit.
Approaches to utility
There are two approaches to the concept of
utility.
The classical economists believed utility could
be measured and they defined it as cardinal
utility.
On the other hand, the ordinal utility approach
explained that utility cannot be measured and
could only be ranked based on individual
tastes and preferences.
Hence, they defined utility as ordinal utility. It
explains utility with Indifference Curve
Technique.
Indifference schedule
An indifference schedule may be defined as a
schedule of various combinations of two
commodities which yield the same level of
satisfaction to the consumer.
Indifference Curve
The indifference curve is defined as locus of
the various combinations of two commodities
which provide the same total satisfaction to the
consumer.
The curve is also referred to as the iso- utility
curve or curve of equal utility (Figure 2).
Indifference Map
An indifference map shows a collection of
indifference curves each of which offer a
certain total satisfaction to the consumer.
The indifference curves are numbered in
ascending order (Figure 3).
Properties of indifference curves
The indifference curves show three important
properties:
i) they are downward sloping,
ii) they are non-intersecting and
iii) they are convex to the origin
Consumer’s Surplus
The law of diminishing marginal utility helps
to explain the concept of consumer’s surplus.
The excess of utility foregone or disutility
suffered is called consumer’s surplus.
Hicks defined it as the difference between the
marginal valuation of a unit of good and the
price which actually paid for it.
It simple terms, consumer’s surplus refers to
the difference between what we are prepared to
pay and what we actually pay.
The concept of consumer’s surplus is seen in
the case of purchase of very useful
commodities yet cheap. Some of the examples
include soap, salt, post card, match box, new
paper etc.
The consumer surplus is graphically presented
in Figure 4.