Explain the law of diminishing marginal utility with exception.
|NU Year||Set: 4.(b) Marks: 7 Year: 2012|
Law of diminishing marginal utility with exception :
There are various limitations / exceptions of the law of diminishing marginal utility. Major limitations are as follows:
The law of diminishing marginal utility assumes that there should be single commodity with homogeneous units. All units of the commodity should be of the same same size and quality. If the units are not identical, this law will not be applied.
2. No change in tastes, habits, customs, fashion and income of the consumer
There should not be changed in tastes, habits, customs, fashion and income of the consumer. If the income of a consumer increases, the marginal utility of a certain goods will increase. In such case, increase in consumption may yield greater satisfaction or utility.
There should be continuity in the consumption of the commodity; otherwise the law of diminishing marginal utility will not apply. Units of the commodity should be consumed in succession at one particular time. If the interval between the various units of consumption is too long, marginal utility may become higher..
4. Suitable size of units
Units of the commodity should be of a suitable size. It must not be too small. For example, giving water to a thirsty man by spoon will increase the utility of the successive spoon of water.
5. Ordinary commodities
Commodities should be of an ordinary types. If the commodities are likes diamonds and jewels or hobby commodities like stamps, coins or paintings, the law of diminishing marginal utility does not apply.
6. Marginal utility of money not constant
Our intensity for money increases as we have more of it. No doubt the marginal utility of money does not become zero, but it definitely falls as a person gets more and more money.The marginal utility of money for a rich is less than a poor man.
7. Rational consumer
The consumer should be an economic man, who acts rationally. This law does not apply to persons of special nature such as drunkard, druggist etc. Marginal utility of wine for drunkard increases with every peg of drinks.
The law of diminishing marginal utility is one of the vital laws of economics.
The law represents the fundamental tendency of human behavior.
According to the law, when a consumer increases the consumption of a good, there is a decline in MU derived from each successive unit of that good, while keeping the consumption of other goods constant.
In other words, as more and more of goods are consumed, the process of consumption at some point yields smaller and smaller additions to the utility. For example, an individual feels very hungry and decides to have golgappas. The first golgappa consumed by him/her gave maximum satisfaction to him/her. In such a case, on a 10-point scale, he would give ten points.
Thus, the utility derived from first unit of golgappa would be ten. His/her rate of satisfaction is best till eight points. After that, utility starts declining as he/she eats more and more golgappas; therefore, he may stop consuming golgappas. If he/she keeps mating golgappas, he/she may eventually reach a point at which eating golgappas would provide dissatisfaction to him/her. This would make utility zero or negative, leading to disutility.
This law applies to all kinds of consumer goods, such as durable and non-durable goods. The utility of a good is measureable in a quantitative term called utils. Let us now learn the law of diminishing marginal utility with the help of an example. Assume that a consumer only consumes good X.