State and explain the law of Diminishing Marginal Utility. Explain its assumptions.

State and explain the law of Diminishing Marginal Utility. Explain its assumptions.
ANSWER:
The law of diminishing marginal utility states that: “As a consumer consumes more and more units of a commodity at succession, the marginal utility derived from the consumption of each additional unit of the commodity falls.”
The law of diminishing marginal utility is based on the following assumptions.

i. Reasonable size of units - A consumer consumes only standard units of the commodity such that the size of the commodity is neither too big nor too small. For example, consuming the whole of an apple, and not half of it.
ii. Continuous consumption - Consumption of the successive units of the commodity takes place continuously (i.e. without any time lag).
iii. Homogeneous units - The law also assumes that the quality of the commodity remains the same throughout the process of consumption.
iv. Rational consumer - The law is applicable only if the consumer is a rational human being. That is, he should make rational consumption decisions.
v. Constancy - There is no change in the tastes, preferences, income or habits of the consumers.
vi. Cardinal measurement - The law only holds if the consumer is able to express its utility in terms of utils. That is, utility can be measured cardinally (or numerically).
vii. Single use – The law of diminishing marginal utility assumes that a commodity is consumed to satisfy a single want and not multiple wants at the same time.
viii. Divisibility - This assumption implies that the commodities meant for consumption can be divided into small quantities. This division into small quantities makes its consumption faster.
ix. Constant marginal utility of money - Utility of income left after consumption is the same as the utility of total income before consumption.

No comments: