Low of diminishing marginal utility

LOW OF DIMINISHING MARGINAL UTILITY

INTRODUCTION

                    This law was formulated by a neo-classical economist by name 'Alfred Marshall'. He has explained this law in his book 'principles of Economics' published in the year 1890. In this law he has explained the functional relationship between units of the commodity consumed and marginal utility derived. This law is the basis for the law of demand.

Meaning of marginal utility and Total utility

Marginal utility refers to "An addition made of the total utility when one more unit of the commodity is consumed" or "it is the utility derived from the consumption of an extra unit or last unit of the commodity."

Formula:  MU(n)th unit=TU(n-1)th unit

Total utility refers to 'The sum total of marginal utility derived by the consumer from the consumption of all the units of a commodity at a point of time or during a period of a time.'

Formula:  TU=£MU

Statement of the law:

Dr. Marshall has stated the law as-

"The additional benefit which a person derives from the given stock of thing diminishes with every increase in the stock that he already has."

The law also may be stated as-

"Other things remaining the same, when a consumer consumes more and more units of a commodity the marginal utility derived from each and every successive unit of the commodity keeps on diminishing or reducing or declining."
Illustration:

Illustrations

In the above table when the consumer consumes the first unit of commodity say apple, he derives 10 units of marginal utility. When he consumes the second apple he derives 8 units of MU. As he consumes more and more units of the commodity the marginal utility derived keeps on diminishing like 6 units, 4 units and so on. When he consumes the 6 unit of commodity he drives zero or marginal utility. But total utility is maximum when MU is zero. Marginal utility diminishes but total utility increases at a diminishing rate. If the consumer gets maximum satisfaction then he is said to have attained or reached the point of satiety. Satiety means maximum satisfaction. The consumer attains the state of satiety when TU is maximum and MU is zero.
        If the consumer consumes further say 7th unit of the commodity, instead of deriving or gaining marginal utility the consumer loses MU by 2 units I.e. -2unit of MU. This loss of utility is Called as disutility or negative utility which is shaded in the following diagram.
Diagram:
 

Diagram

In the above diagram, we have represented units of commodity in x-axis. Marginal utility and total utility are represented in Y-axis. When we represented the figures of units of the commodity and MU we got the points a,b,c,d,e,f,g on the diagram. The locus of all these points constitutes MU curve. The MU curve slopes downwards or has negative slope due to the inverse relationship between units of commodity consumed and marginal utility derived.
         When we represented the figures of units of the commodity consumed and total utility we got the points h,I,j,k,l,m on the diagram. The locus of all these points constitute TU curve. The TU, curve has a positive slope due to direct relationship between units of commodity consumed and total utility.