Economics

Cardinal Utility Analysis

The Law of Diminishing Marginal Utility (DMU)

Introduction:
H.H.Gossen, an Austrian Economist was the first to formulate this law in Economics in 1854. Therefore, Jevons called this law as “Gossen’s First Law of Consumption”.But credit goes to Marshall, because he perfected this law on the basis of Cardinal Analysis. This law is based on the characteristics of human wants, i.e., wants are satiable.

Marshall:
Marshall states the law as, “the additional
benefit which a person derives from a given increase of his stock of a thing,diminishes with every increase in the stock that he already has”.

Assumptions:
1. Utility can be measured by cardinal numbers such as 1, 2, 3 and so on.
2. The marginal utility of money of the
consumer remains constant.
3. The consumer should be a rational
consumer and his aim is to attain maximum satisfaction with minimum expenditure.
4. The units of the commodity consumed
must be reasonable in size.
5. The commodity consumed should be homogeneous or uniform in character like weight, quality, taste,colour etc.
6. The consumption of goods must take place continuously at a given period of time.
7. There should be no change in the taste, habits, preferences, fashions,income and character of the consumer during the process of Consumption.

Explanation: The Law of Diminishing Marginal Utility states that if a consumer continues to consume more and more units of the same
commodity, its marginal utility diminishes. This means that the more we have of a thing,
the less is the satisfaction or utility that we
derive from the additional unit of it.

Illustration:
The law can be explained with a simple
illustration. Suppose a consumer wants to
consume 7 apples one after another. The
utility from the first apple is 20. But the utility from the second apple will be less than that of the first (say 15), the third less than that of the second (say 10) and so on. Finally, the utility from the fifth apple becomes zero and the utilities from sixth and seventh apples are negative (or disutility or disliking). This tendency is called the “The Law of Diminishing Marginal Utility’.

Criticisms:
1. Utility cannot be measured numerically, because utility is subjective.
2. This law is based on the unrealistic
assumptions.
3. This law is not applicable to indivisible commodities.

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