Law of Diminishing Marginal Utility (DMU) : Meaning, Assumptions & Example

What is Diminishing Marginal Utility (DMU)?

According to the Law of Diminishing Marginal Utility (DMU), with the consumption of more and more units of a commodity, the utility obtained from each successive unit decreases. Most consumers spread their income among different varieties of goods when making choices. People prefer a variety of goods as consuming more and more of any one good diminishes the marginal satisfaction obtained from continued use of that good. This law explains a significant relationship between utility and the quantity of a commodity that is consumed. This can be better understood by using the example mentioned below.

Suppose your mother offers you food after you just got home from work. The first chapatti will provide you with great satisfaction. With the second chapatti, you will feel less satisfied. As you consume more, you will reach a point where you will need another chapatti where the marginal utility will be zero. After that, if you are forced to eat even one more chapatti, it will lead to disutility. The Law of Diminishing Marginal Utility causes such a decrease in satisfaction with successive unit consumption.

The DMU law is universally applicable, and it applies to all products and services. It was initially proposed by a German economist, H.H. Gossen. Thus, it is also known as Gossen’s First Law of Consumption.

Assumptions of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility functions under specific conditions. They are known by economists as “assumptions of law.” These are listed below:

1. Cardinal Measurement of Utility: It is assumed that utility can be measured and that a consumer can express his satisfaction using numbers, such as 1, 2, etc.

2. Monetary Measurement of Utility: The law of diminishing marginal utility assumes that utility can be measured in monetary terms.

3. Consumption of Reasonable Quantity: It is assumed that the commodity is consumed in a reasonable qua ntity. For instance, rather than comparing the MU of spoonfuls, one should compare the MU of glasses of juice. If a thirsty person is given juice in a spoon, then each extra spoon will provide him with increased utility. Therefore, for the law to be true, proper quantity of the good is to be consumed.

4. Continuous Consumption: It is assumed that consumption is a continuous process. For instance, if you have one cup of milk in the morning and another in the evening, then the second cup of milk can provide equal or higher satisfaction when compared to the first one.

5. No change in Quality: It is expected that the commodity consumed is of constant quality. If the first cup of milk has no added sugar and chocolate, the second cup of milk with added sugar and chocolate can satisfy you more than the first.

6. Rational Consumer: The rational consumer measures, compute, and evaluate the utility of various commodities to maximise overall satisfaction.

7. Independent Utilities: All of the commodities a consumer consumes are assumed to be independent. Hence, there is no relationship between the MU of one commodity and the MU of another. Furthermore, it is assumed that the utility of one person is unaffected by the utility of another person.

8. Marginal Utility of Money remains Constant:

A consumer has less money to spend on other commodities after paying for the commodity. This process increases the MU of money for the consumer and makes the remaining cash dearer to them. However, such an increase in MU is ignored. It is assumed that the MU of money is constant since the MU of a commodity must be measured in monetary terms.

9. Fixed Income and Prices: It is assumed that the consumer’s income and the price of the goods they want to purchase remain constant.

10. Perfect Knowledge: It is assumed that the consumer has knowledge of the different goods on which his income can be spent and the utility that he is likely to derive from such consumption. It indicates that the customer has perfect knowledge of all of the various choices available to him.

Example of Diminishing Marginal Utility

The concept of diminishing marginal utility can be better understood with the help of the following schedule and diagram:

Law of Diminishing Marginal Utility

In the above diagram, the units of apples are displayed on the X-axis and the MU on the Y-axis. Points A, B, C, D, and E reflect the MU from each successive unit.

It can be observed as the consumption of apples rises, the rectangles (which represent each level of satisfaction) get smaller and smaller. When consumption is increased from first to second and then third, MU decreases from 25 to 17 and then to 12 utils. The fifth apple is the Point of Satiety and has no utility (MU= 0). When the sixth apple is consumed, MU turns negative. The downward-sloping MU curve indicates that the MU of successive units is decreasing.