What is the Law of Marginal Utility?
Marginal utility is the satisfaction derived from increased consumption of a product or service and as a general principle, marginal utility decreases with more and more consumption. This is called the theory or the law of diminishing marginal utility and was first proposed by the German Economist H.H.Gossen in the 19th century.
Examples of Marginal Utility
The following are examples of the law of marginal utility.
Let us first understand this concept with the help of a basic example of everyday life.
Say, you are hungry and had food to satiate your hunger. This meal would be extremely satisfying. But after that, you decide to have some more food. This would not be as good as the first because you are already full. So the ‘utility’ you had when you ate the second meal is less than that of the utility you had while you ate the first meal.
This applies to many and most products like medicines, cosmetics, food, drinks, chocolates, etc.
4.9 (831 ratings) 117 Courses | 25+ Projects | 600+ Hours | Full Lifetime Access | Certificate of Completion
If we can treat this example with the help of numbers by assigning numbers or units to the utility achieved to the utility obtained by consuming a product, say an ice cream, it will be as follows:
If we plot the above data on marginal utility graph, it would look like this:
As we can see, there is a fall in the marginal utility which is interpreted to be its very nature.
Assumptions of Law of Marginal Utility
Some of the assumptions are as follows:
- The goods being consumed must be similar or alike i.e., of the same size, same shape, and same composition.
- The consumer’s taste and preferences shall be constant while consumption happens.
- The marginal utility of money shall also remain constant while consumption happens.
- The consumer should be normal and vigilant and not anomalous and illogical.
- There must not be a huge time gap between the consumption and the consumption pattern must be regular.
- This law assumes that the utility is such that it is capable of being expressed in units/ numbers or any measurable quantity called utils.
But there are exceptions to the law of Diminishing marginal utility which means there are certain products, the utility for which increases as the consumption increases. Let us get to know about such products:
- Durable goods
- Rare collections, artifacts, etc.
- Goods which are not similar
Also, certain conditions when such law does not apply are as follows:
- Change in the income of the consumer.
- Change in tastes and preferences of the consumer.
- Goods are being consumed by a person who does not fall under the category of a normal consumer.
- The time gap between the consumption of goods is too long.
- When goods are such that a person consumes them in abnormal quantities.
Advantages of Marginal Utility
Some of the advantages are a follows:
- This law forms the basis for other laws and concepts related to consumption such as the law of demand, consumer surplus, etc.
- This helps the government and the finance ministry of a country to transfer money from those whose marginal utility of money is lower to those who require it in the form of progressive tax.
- This law is used by socialists to endorse equal distribution of wealth among everyone in the society to remove social class and inequality.
- This helps the manufacturer or producer in increasing the sales by reducing prices so that they obtain maximum satisfaction for every rupee they spend.
Disadvantages of Marginal Utility
Some of the disadvantages are a follows:
- Unrealistic Assumptions: The assumptions taken by the law of diminishing marginal utility such as the constant utility of money, utility being measurable, the rationality of consumers are treated to be unrealistic by economists which leads to this law being subject to high criticism.
- Few Important Factors Being Ignored: The theory ignores the complements and the substitutes available in the market. In reality, the utility of a product depends on the compliments and substitutes of a product. For e.g., the purchase of a motor vehicle depends on the fuel costs in the market.
Marginal Utility means the additional utility that is derived from consuming an additional unit of a product or service. The basic nature of the marginal utility is that it decreases with every additional product consumed as propounded by the economist H.H.Gossen called the Law of Diminishing Marginal Utility, sometimes also referred to as Gossen’s First Law.
But for this declining marginal utility, there were certain assumptions taken as discussed above, some of which were considered to be unrealistic. The law also has ignored certain factors that are necessary to determine the marginal utility of the products which made the then economists question its validity.
That said, the law has a lot of merits like helping the government in tax regimes, helping the producer in understanding the market and the consumers, assisting socialists to prove their contentions, etc.
This has been a guide to what is marginal utility and its definition. Here we discuss examples of the law of marginal utility along with assumptions, advantages, and disadvantages. You can learn more from the following articles –