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Diminishing Marginal Utility Definition
The law of Diminishing Marginal Utility is an economic concept. It applies to when a particular commodity is consumed. Consumption of a commodity produces a benefit; but, as consumption grows, the benefit from consuming an additional or higher volume of a commodity goes down. The word “utility” is used to represent the benefits of consumption.
A Little More on what is Diminishing Marginal Utility
Marginal utility means an extra total utility which one gets by spending one unit more on the same thing. When we increase the consumption of some commodity, the marginal utility of that commodity goes on decreasing, i.e. the amount of satisfaction gained from an additional unit of that commodity decreases.
To explain this economic law, we show the demand curve sloping down. With the increase in the use of a thing, the intensity of want goes down. Hence, the utility gained from the extra unit goes down as well.
In the finance market, according to an economist named Marshall, the extra benefit an individual gets from a given rise in his stock diminishes with every subsequent rise in stock.
Assumptions about Law of Diminishing Marginal Utility
For the Law of Diminishing Marginal Utility (DMU), we assume some aspects of life such as:
- All units of a thing must be similar in all aspects. (In the above example, all pieces of bread are same in taste, color, size, freshness, etc.)
- We take a standard unit for the thing. (A piece of bread is taken as a standard unit in the example)
- The taste of a man does not change while consuming a commodity. (Man does not suffer from any disease that can change the taste of bread).
- The man consumes a particular thing continuously, means without any gaps or intervals. (The man eats bread continuously, i.e. one after another. He does not stop eating and start after a break).
The substitute commodities remain at the same price as before. (There’s no decrease in the price of flour, loaf, pizza or any other item which can be a substitute of bread, otherwise, he may leave the bread and buy cheaper alternative).
The Law of Diminishing Marginal Utility is very important in deriving many other concepts of economics such as
(I) It acts as a base to the Law of Demand.
(II) It is a base to the Consumption Expenditure
(III) This Law is a base for the Progressive Taxation
References for Diminishing Marginal Utility
Academic Research on Law of Diminishing Marginal Utility
The law of diminishing marginal utility in Alfred Marshall’s principles of economics, Ormazabal, K. M. (1995). Journal of the History of Economic Thought, 2(1), 91-126. This paper explains the concept of the Law of Diminishing Marginal Utility. It contains 7 parts. First is about basic 8 formulations that act as a base to the Law. In the 2nd and 3rd part, the author discusses the points in which Marshal himself presents objections on the universal validity of this law. In the 4th part, the difference between the Law of Utility and Law of Demand is discussed. In the 5th part, the author describes 2 meanings of the term Utility. The 6th part contains an explanation of the law with the problems faced. 7th and last part derive a conclusion.
THE LAW OF DIMINISHING MARGINAL UTILITY OF INCOME AN INVESTIGATION OF ITS VALIDITY, Marx, W. (1949). THE LAW OF DIMINISHING Kyklos, 3(3), 254-272. This paper elaborates the Law of Diminishing Marginal Utility (DMU) in perspective of income and further investigates its validity thoroughly. The author says that economic laws are closely related to physical and psychological facts. So, it is illegitimate to apply these laws on the economic life of a person only. It cannot be separated from other aspects of life.
A Study on Fossilization from the Perspective of the Law of Diminishing Marginal Utility [J], Yu-ping, B. A. I. (2009). Science Economy Society, 2, 014. This study is about Fossilization in detail. The author explains it in the context of the Law of Diminishing Marginal Utility, also known as DMU. This law does not merely apply to the consumption behaviour of people, but other behaviours as well. Fossilization means a phenomenon in which the language skills of learners halt or decline within six to twelve years. The researchers have described a number of reasons for it. This paper illustrates that language study is also concerned with the law of DMU. The author suggests some ideas for problem-solving in this regard.
Under what circumstances might demand and price rise? Does such an observation contradict the law of diminishing marginal utility?, Dawson, G. (1989). Economic Affairs, 10(1), 41-42. This paper investigates the circumstances in which the price and demand factors increase. The author applies it to the Law of Diminishing Marginal Utility (DMU) and provides a detailed answer to the question, does increase in price and demand contradict the law of DMU.
Influence of Law of Diminishing Marginal Utility on Tourism Products and its Precautions, Yakun, S., & Miaochan, L. (2011). Journal of Suihua University, 2, 025. This research highlights the impacts of the Law of Diminishing Marginal Utility (DMU) on travel products and also tells what precautions can save us from decreasing utility in tourism.
Recognition of the Law of Diminishing Marginal Utility [J], Dan-tao, W. U. (2008). Journal of Huizhou University (Social Science Edition), 4, 017. In this paper, the author presents a recognised analysis of the law of Diminishing Marginal Utility (DMU). The author states that this law is the basic theory in the subject of microeconomics. Some economists describe the limitations of this law. Similarly, it contains strict pre-conditions. But these are views of different economists. In actual, it plays a vital role in one’s life.
Differences between Law of Careless Money and Law of Diminishing Marginal Utility, Wang, Z. (2012). This paper is based on the comparison between the Law of Careless Money and DMU (the Law of Diminishing Marginal Utility). Both of them are related to the utility concept having a similar hypothesis of economic man. But they differ from each other on some grounds. The former is a rule in which people do not care about money if there are some conditions on its use. On the other hand, the latter is a rule in which people continuously use a similar item and obtain marginal utility. The law of DMU shows the economic behaviour of people with respect to consumption, while the law of CM does not show the economic behaviour of people in the consumption prospect rather in the donation.
Diminishing marginal utility of income? Caveat emptor, Easterlin, R. A. (2005). Social Indicators Research, 70(3), 243-255. The Law of Diminishing Marginal Utility (DMU) of Income says that the impact on personal well-being of one thousand US dollars in real income increasingly becomes smaller, as the income level increases initially. Applying this law, the pattern of point-of-time should be double overtime, when the income crosses the value range covered in the analysis of the cross-section. The author presents a curvilinear happiness relationship to income. Happiness will follow as the income increases over time. Lastly, the author makes a comparison between the changes in real time series and its relation to the cross-section. It is not a reliable guide that we can infer over time about policy.
GLOBE practices and values: A case of diminishing marginal utility?, Brewer, P., & Venaik, S. (2010). Journal of International Business Studies, 41(8), 1316-1324. This paper is about GLOBE study that identifies 9 cultural dimensions. The economists measure these dimensions in social practices (as it is) and social values (as it should be). For 7 dimensions, their correlation was found fairly negative. In actual, people tend to have different values as compared to practices. This correlation is the result of Diminishing Marginal Utility. The analysis shows that the GLOBE queries, as asked, don’t provoke marginal preferences. Anyways, various explanations have different dimensions in regard to the relationship between value/practice.
Diminishing Marginal Utility of Income and Progressive Taxation: A Critique of The Uneasy Case. Stein, M. S. (1991). N. Ill. UL Rev., 12, 373. This paper makes a critical analysis of the uneasy aspect of Diminishing Marginal Utility (DMU) of income and underlying progressive taxation. The discussed utility patterns include function and finery, savings, subsistence income, higher quantities and the impossible shopping scenario.
The Austrian theory of the marginal use and of ordinal marginal utility, McCulloch, J. H. (1977). Zeitschrift für nationalökonomie, 37(3-4), 249-280. The concept of Marginal Utility has been restated and modified in the Austrian Theory. It does not depend on cardinal utility. It has consistency with Intrinsically Ordinal (IO) Utility. Here, diminishing utility is related to rational choice and not the assumption. The author explains the concept with the help of examples for a complimentary, rival and independent goods. The goods preferences are quasi-concave. So, the Hicksian assumption is superfluous. The criteria of Auspitz & Lieben Edgeworth Preto for the net complementary goods or rivalry is emergent.