Law of Diminishing Returns

Law of Diminishing Marginal Utility

Utility refers to the amount of satisfaction a person gets from consumption of a certain item.and marginal utility refers to the addition made to total utility, we get after consuming one more unit.

An individual's wants are unlimited in number yet each individual's want is satiable. Because of this, the more we have a commodity, the less we want to have more of it.

This law state that as the amount consumed of a commodity increases, the utility derived by the consumer from the additional units, i.e marginal utility goes on decreasing.

The law of diminishing marginal utility explains the downward sloping demand curve

Definition

According to Marshall, "The additional benefit 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:

All the units of a commodity must be same in all respects

The unit of the good must be standard

There should be no change in taste during the process of consumption

There must be continuity in consumption

There should be no change in the price of the substitute goods

Explanation:

As more and more quantity of a commodity is consumed, the intensity if desire decreases and also the utility derived from the additional unit.

Suppose a person eats Bread. and 1st unit of bread gives him maximum satisfaction. When he will ead 2nd bread his total satisfaction would increase. But the utility added by 2nd bread(MU) is less then the 1st bread. His Total utility and marginal utility can be put in the form of a following schedule.

Plotting the above data on a graph gives

* Here, from the MU curve we can see that MU is declinig as consumer consumes more of the commodity.

* When TU is maximum, MU is Zero.

* After that, TU starts declining and MU becomes negative.

Exceptions:

* Money

* Hobbies and Rare Things

* Liquor and Music

* Things of Display

Importance:

* Basis of Law of Demand

* Basis

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