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    The Law of Diminishing Marginal Utility States That

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    Manoj
    The document discusses the law of diminishing marginal utility and the law of equi-marginal utility. The law of diminishing marginal utility states that as a consumer consumes more of a good, the marginal utility from each additional unit decreases. This is illustrated with an example of eating food where the first bites provide more satisfaction than later bites. The law of equi-marginal utility states that a consumer will maximize satisfaction when the marginal utility per rupee spent is equal across all goods, given prices and a limited budget. This ensures the last rupee spent on each good provides equal marginal utility.

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    The Law of Diminishing Marginal Utility States That

    Uploaded by

    Manoj
    33 views11 pages
    The document discusses the law of diminishing marginal utility and the law of equi-marginal utility. The law of diminishing marginal utility states that as a consumer consumes more of a good, the marginal utility from each additional unit decreases. This is illustrated with an example of eating food where the first bites provide more satisfaction than later bites. The law of equi-marginal utility states that a consumer will maximize satisfaction when the marginal utility per rupee spent is equal across all goods, given prices and a limited budget. This ensures the last rupee spent on each good provides equal marginal utility.

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    The document discusses the law of diminishing marginal utility and the law of equi-marginal utility. The law of diminishing marginal utility states that as a consumer consumes more of a good, the marginal utility from each additional unit decreases. This is illustrated with an example of eating food where the first bites provide more satisfaction than later bites. The law of equi-marginal utility states that a consumer will maximize satisfaction when the marginal utility per rupee spent is equal across all goods, given prices and a limited budget. This ensures the last rupee spent on each good provides equal marginal utility.

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    33 views11 pages

    The Law of Diminishing Marginal Utility States That

    Uploaded by

    Manoj
    The document discusses the law of diminishing marginal utility and the law of equi-marginal utility. The law of diminishing marginal utility states that as a consumer consumes more of a good, the marginal utility from each additional unit decreases. This is illustrated with an example of eating food where the first bites provide more satisfaction than later bites. The law of equi-marginal utility states that a consumer will maximize satisfaction when the marginal utility per rupee spent is equal across all goods, given prices and a limited budget. This ensures the last rupee spent on each good provides equal marginal utility.

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    LAW OF DIMINISHING MARGINAL 

    UTILITY
    • The Law of Diminishing Marginal Utility states that, 
    • “As a consumer consumes more and more units of a specific commodity, the utility from the
    successive units goes on diminishing”.

    • X-axis represents the number of units of a


    good consumed 
    •  Y-axis represents the marginal utility of
    that good
    Let us understand the concept first using some very basic examples of
    the law of diminishing marginal utility.
    Example:
    • Suppose if a person is very hungry and has not eaten any food all
    day. When he finally starts to eat, the first bite will give him a lot of
    satisfaction. As he keeps on eating more and more food, his appetite
    will go down and come to a point where he does not want to eat
    anymore.
    Assumptions:
    • Rational Consumers – It requires consumers to behave rationally. They should
    make rational decisions at all times. The law assumes that consumers are trying
    to maximize utility at all times subject to their incomes.

    • Continuous Consumption – This assumption is very important for the law to


    hold true. It means that the consumer is continuously consuming every
    additional unit of the good. There should not be intervals between the
    consumption of additional units.
    • Standard Size of Units – The size of every unit should be standard. If a person drinks half of a glass of
    water, drinking another half glass after it might not diminish the utility since he has not yet derived the
    total utility from consuming a full unit of the good being consumed here. Reducing the size of units
    consumed is not consistent with the law of diminishing marginal utility.

    Exceptions:
    • Addictions/Hobbies – This law does not hold in case of addictions. 

    • Rare Items – It also does not hold true in the case of rare items. For example,
    acquiring a limited edition watch might give much more satisfaction to an
    enthusiast who likes collecting watches and already has a lot of them.
    • Unrealistic Assumptions – Assumptions made by this law don’t always hold true. Like
    consumption with intervals which are irrational.
    LAW OF EQUI-MARGINAL UTILITY

    • Law of Equi-marginal utility was presented in 19th century by


    an Australian economists H. H. Gossen. It is also known as law
    of maximum satisfaction or law of substitution or Gossen's
    second law.

    • The law states that ''a consumer should spend his limited
    income on different commodities in such a way that the
    last rupee spent on each commodity yield him equal
    marginal utility in order to get maximum satisfaction''.
      

    • Suppose there are different commodities like A, B, …, N. A consumer


    will get the maximum satisfaction in the case of equilibrium i.e.,

                    MUA / PA = MUB / PB = … = MUN / PN


    Explanation:
    Assumptions:

    1.        The consumer is rational so he wants to get maximum satisfaction.

    2.        The utility of each commodity is measurable.

    3.        The marginal utility of money remains constant.

    4.        The income of the consumer is given.

    5.        The prices of the commodities are given.

    6.        The law is based on the law of diminishing marginal utility.


    Limitations of the Law:

    The law of equi-marginal utility bristles with the following difficulties.

    1. Indivisibility of Goods

    The theory is weakened by the fact that many commodities like a car, a house etc. are
    indivisible. In the case of indivisible goods, the law is not applicable.

    2. The Marginal Utility of Money is Not Constant

    The theory is based on the assumption that the marginal utility of money is constant.
    But that is not really so.
    3. The Measurement of Utility is not Possible
    • Marshall states that the price a consumer is willing to pay for a commodity is equal
    to its marginal utility. But modern economists argue that, if two persons are paying
    an equal price for given commodity, it does not mean that both are getting the same
    level of utility. Thus utility is a subjective concept, which cannot be measured, in
    quantitative terms.

    4. Utilities are Interdependent


    • This law assumes that commodities are independent and therefore their marginal
    utilities are also independent. But in real life commodities are either substitutes or
    complements. Their utilities are therefore interdependent.

    5. Indefinite Budget Period


    • The budget period of consumer is not definite. Budget periods refer to that period in
    which a consumer has to spend his income of different uses. It may be a month or
    year. Goods like TV Set, Refrigerator are bought in one budget period, but they
    continue to yield utility over many budget periods.
    Importance:

    According to Marshall, 'the applications of this principle extend over almost every field of economic activity.'

    1. It applies to consumption

    Every rational human being wants to get maximum satisfaction with his limited means. The consumer arranges
    his expenditure in such a way that,   MUx/Px =MUy/Py = MUz/ Pz   so that he will get maximum satisfaction.

    2. It applies to production

    The aim of the producer is to get maximum output with least-cost, so that his profit will be maximum. Towards
    this end, he will substitute one factor for another till

    MPl / Pl = MPc / Pc = MPn / Pn

    3. Distribution of Earnings Between Savings and Consumption

    According to Marshall, a prudent person will endeavour to distribute his resources between his present needs
    and future needs in such a way that the marginal utility of the last rupee put in savings is equal to the marginal
    utility of the last rupee spent on consumption.
    4. It applies to distribution

    The general theory of distribution involves the principle of substitution. In distribution, the rewards to
    the various factors of production, that is their relative shares, are determined by the principle of equi-
    marginal utility.

    5. It Applies to Public Finance

    The principle of 'Maximum Social Advantage' as enunciated by Professors Hicks and Dalton states
    that, the revenue should be distributed in such a way that the last unit of expenditure on various
    programmes brings equal welfare, so that social welfare is maximised.

    6. Expenditure of Time

    Prof. Boulding relates Marshall's law of equi-marginal utility to the expenditures of limited time, i.e.
    twenty-four hours. He states that a person should spend his limited time among alternative uses such
    as reading; studying and gardening, in such a way that the marginal utility from all these uses are
    equal.
    Done By:

    • MANOJ J
    • MANIKANDAN
    • MATHINIKA

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