freeapp

Gossen, a German economist, is the first to explain the law of diminishing marginal utility based on general observations of human behavior. Because of this reason, the law is further termed as ‘Gossen’s first law’.

What does the law state?

The law of diminishing marginal utility states that the utility derived from each successive unit of a commodity diminishes. To put it simply, even the most beautiful place of the world or the sweetest music can make you feel bored after certain stage. 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 1). This means that the individual does not need the commodity further.

Assumptions of the Law of Diminishing Marginal Utility

The law of diminishing marginal utility is based on the following explicit assumptions:

1.Homogeneity:-Each unit of the commodity under consideration is identical in all aspects such as quality, taste, color, size and so on.

2.Reasonability:-Each unit of commodity under consideration must be same and standard. For example, 100 ml of coffee, 200 grams of apple and so on.

3.Constancy:-The law of diminishing marginal utility assumes that consumer’s consumption pattern, tastes, preferences, income, and price of the commodity and its substitutes are constant during the process of consumption.

4.Continuity:-The law further assumes that consumption is a continuous process and there is no room for any time gap.

5.Rationality:-Finally, for the law to hold well, the consumer must be a rational economic man. In addition, the law assumes that the consumer’s mental condition remains normal during the process of consumption.

Total utility

Total utility, as the term indicates, is the utility derived from all units of commodity. Suppose that a person consumes 10 oranges. In this case, the total utility is obtained by adding the utility derived from each unit of orange. In our example (Table 1), the total utility derived from the first six oranges is 21 (21 = 6 + 5 + 4 + 3 + 2 + 1).

Marginal utility

Marginal utility is the utility from a successive unit of commodity. To put it simple, marginal utility represents the utility derived from each unit of commodity under consideration.
Symbolically,
MU =ΔTU/ΔC where,
TU = total utility
ΔTU = change in total utility (TUn – TUn-1)
C = consumption and ΔC = 1 unit or
In other words, marginal utility of nth unit of commodity A is the difference between the total utility of nth unit and the total utility of (n-1)th unit of the commodity.

freeapp

LEAVE A REPLY

Please enter your comment!
Please enter your name here