The law of diminishing marginal utility expresses an important relation between utility and quantity consumed of a commodity. This law describes a basic fact and common experience of daily life.
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For example, if a glass of water is given to a thirsty person, it will give him some satisfaction. The satisfaction derived will be lesser, if another glass of water is given to him. Eventually, the utility of water will drop to zero. If he is forced to consume one additional glass of water, it will lead to disutility.
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The law of diminishing marginal utility can be stated as, the utility which a consumer derives from the consumption of each additional unit of a commodity keeps decreasing with every increase in the stock of the commodity which he already has.
This law is based upon the following assumptions:
(1) Rationality:
The consumer is assumed to be rational. He aims at the maximisation of his utility subject to the constraint imposed by his given income. The consumer has perfect knowledge about the product and its marginal utility. The choice between various goods by him is determined by his own evaluation of self-interest.
(2) Cardinal Utility:
Cardinal measurability of utility implies that utility is measurable and it can be quantified. It can be added, subtracted, multiplied and divided. The unit of measurement of utility is util. However, Marshall argues that the amount of money which a person is prepared to pay for a unit of good rather than go without it is a measure of utility he derives from that good.
(3) Independence of Utilities:
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The utilities of different commodities are independent of one another. It is assumed that utility derived by a consumer from a good depends upon the quantity of that good only. Thus, the utility that a consumer gets from a good does not depend upon the consumption of other goods.
The total utility that a consumer gets by consuming different goods is equal to the sum of the individual utilities of all the goods. Thus, utility is additive. For a given utility function reflecting the tastes and preferences of the consumer:
U = f (Q1, Q2, Q3………….. Qn) (Price does not enter in the utility function)
U = U, (Q1) + U2 (Q3) + U3 (Q3) +……………. + U (Qn)
(4) Introspection:
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The utility analysis assumes introspection, that is, from one’s own experience; it is possible to draw inferences about other person. In introspection, we believe that minds of all the persons work identically in similar situations. Thus, by looking into ourselves we see inside the heads of other individuals.
This form of comprehension may be just a guess work or intuition or the result of a long lasting experience. Here, the economists reconstruct or build up with the help of their self observations, the trend of feeling which goes on in other men’s minds. That is, we attribute to other persons what we ‘know of our own mind. This assumption is important to analyse the behaviour of all the human beings in similar situations.
(5) Continuous Consumption Process:
The law assumes that there is no time gap between the consumption of two successive units of the commodity. If there is discontinuity in consumption, the intensity of want get revived. For example, if one mango is consumed in morning and another in evening, the second mango may provide higher utility.
(6) Homogenous Units of Commodity:
All the units of the commodity consumed are assumed to be normal and homogenous, both quantitatively and qualitatively. If a delicious ripe mango is eaten after consuming an unripe mango, the second mango may give greater utility.
(7) No Change in Personal, Social and Mental Conditions of Consumer:
The operation of the law of diminishing marginal utility requires that personal, social and mental conditions of the consumer should remain unchanged. In other words, his income, tastes, fashions and habits should not change. Further, his mental condition should not change, since such change may adversely affect his rational thinking.
(8) Constancy of Marginal Utility of Money:
Marshall’s marginal utility analysis presupposes that marginal utility of money is constant. This assumption was first introduced by D. Bernoulli. It was later adopted by Marshall in his analysis. This assumption is very crucial in Marshallian analysis.
The validity of assumption is that the money is used as a measuring rod of utility. To be a unit of measurement, utility derived from money should remain constant throughout, whether the stock of money is rising or falling. If the unit of measurement itself varies, then it will give different results in different circumstances for the same quantity of good.
In the words of Tapas Majumdar,
“If money is supposed to provide the measuring rod of utility, then evidently as with all measuring rods its unit must be invariant, it must measure the same amount of utility in all circumstances”.