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Tuesday, 3 May 2011

Explain the law of Diminishing Marginal utility and discuss its limitations and importance


LAW OF DIMINISHING MARGINAL UTILITY :- It is a common experience of every consumer that as he gets more units of a particular, commodity the marginal utility goes on diminishing. This tendency on the part of a marginal utility to diminish with every increase in the stock of a thing is called law of diminishing marginal utility.

MARSHALL SAYS, " The additional benefit which a person derives from an increase of his stock of a thing diminishes with every increase in stock that he already has."

EXAMPLE OF DIMINISHING MARGINAL UTILITY :- This law can be explained by the following example. Suppose in the month of June a person start drinking water. First glass of water has a great utility for him. If he takes the second glass of water, the utility will be less than the first. If he drinks the third glass , the utility of third will be less than the second, and so on. The utility goes on diminishing with the consumption of every next unit and it drops down to zero. If the consumer is forced further, the utility will become negative. This law can also be explained by the following table :


EXPLANATION :- The above table show that first glass of water gives units of utility to the thirsty man. When he takes second the marginal utility drops down to 8. When he consumes the 6th glass the marginal utility drops down to zero and by the use of 7th it becomes negative.


EXPLANATION :- Along "OX" we measure the units of commodity consumed along "OY" utility derived from them. The utility of the first glass of water is represented by the first rectangle and second glass by the second rectangle and so on. FF' curve is the diminishing utility curve.


ASSUMPTIONS OF DIMINISHING MARGINAL UTILITY

1. NATURE OF THE COMMODITY :- There should be no change in the nature of the commodity. For example, If first mango taken is not better, while the second is better, then the utility will not decrease and the utility of second will be greater than first.

2. REASONABLE UNITS :- It is assumed that the units of a commodity which are used should be suitable and reasonable if the units are too small then this law will not operate.

3. CONTINUOUS USE :- It is also assumed that the units of the commodity should be used continuously. If there is interval between the consumption the same two units then the law will not be applicable.

4. NO CHANGE IN INCOME :- It is also assumed that the income of the consumer should not change, otherwise the law may not operate.

5. NO CHANGE IN FASHION AND CUSTOMS :- If there is a sudden change in fashion or customs of a consumer, the law may not operate.

6. RARE COLLECTIONS :- If there are two diamonds in the world the possession of the second diamond will push up the marginal utility.

7. NO CHANGE IN THE STOCK OF OTHER PEOPLE :- Sometimes an increase in the stock of a commodity increases the marginal utility. For example the number of telephone increase in the city, but the utility of our telephone increases.

8. STATE OF MIND SHOULD NOT CHANGE :- If a consumer has been told that mango is a tonic for his health, then marginal utility will increase instead of falling.


EXCEPTIONS OR LIMITATIONS

1. DESIRE OF MONEY :- This law is not applicable in case of money with an increase in wealth man wants to get more and more.

2. DESIRE OF KNOWLEDGE :- Some experts say that man wants to get more and more knowledge so the law can not be applied in this case.

3. USE OF LIQUOR :- With the additional use of liquor like wine marginal utility also goes on increasing.

4. PERSONAL HOBBY :- In case of hobby also this law can not operate. For example , as the collection of tickets increases, its utility also increases.

5. FASHION :- Utility also depends upon fashion. If the fashion of any commodity changes, its utility drops down to zero. On the other hand if fashion exists then utility increases.

7 comments:

Anonymous,  4 July 2012 04:29  

Thanxxzzz itz vry easy

Anonymous,  4 August 2012 13:29  

its really helpful

danial 5 November 2012 06:44  

kamal hai yaaar.. too much helpful than tha book...

irfan shafi 16 November 2012 01:23  

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Anonymous,  28 July 2013 22:32  

yeh bahut kamaal maal hey yarr.... mujhe toh luv hogaya..!! -sanam shrestha
- patan

Anonymous,  3 November 2013 05:30  

its very gud & kulla dan buk

Anonymous,  5 January 2014 03:24  

this help in my assignment.this is so good.

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