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Law of Diminishing Marginal Utility (LDMU)

The Law of Diminishing Marginal Utility is one of the very important and fundamental laws of consumption. This is also known as “Gossen’s 1st Law of Consumption”, named after an Austrian economist Gossen’s who introduced it. This law is based on one of the important characteristic of human want i.e., “Some Human wants could be satisfied”. Prof. Alfred Marshall has developed this LDMU.
Statement: “The additional benefit that a person derives from a given increase in the stock of anything diminishes with the increase in the stock, that he already has” – Marshall. This LDMU states – if one goes on consuming a particular commodity without any time gap, the marginal utility that he derives from every successive unit goes on diminishing.
This concept of LDMU has two important aspects. They are:
  • Total Utility (TU): refers to the aggregate amount of utility derived from consuming all the units of a particular commodity.
  • Marginal Utility (MU): refers to the additional or extra utility that the consumer gets from the consumption of one more extra unit. Symbolically Marginal Utility is represented as MU = TUν – TUn-1. (Here n-1 denotes the previous total utility)
In other words the MU could also be defined as the difference between the Total Utility of the newly consumed good and that of the Total Utility of the previously consumed good.
Let us understand these two aspects more clearly through a imaginary table:


Number of Mangoes


MU = TUn – TUn-1






25 (75-50)



20 (95-75)



15 (110-95)



10 (120-110)



0 (120- 120)



20 (100-120)


Here we may note that TU increases with the consumption of every successive units but at a diminishing rate. On the other hand MU goes on diminishing with the consumption of every successive unit. When MU=0, the TU will be the maximum. If a consumer goes on consuming beyond this point, the TU goes on diminishing and MU will be negative.
This concept could be explained through the diagram also.
Description: 19053.png

Assumptions to Law of Diminishing Marginal Utility (LDMU)

The LDMU is based on certain assumptions. They are:
  • Identical or homogeneous units: The different units of a particular commodity consumed by a person should be identical or same in all respect i.e., colour, size, quality, taste, etc., The Units must be similar.
  • No time gap: In the process of consumption the successive units must be consumed successively one after the other. If there is a long interval between the consumption of one unit and the another unit, then LDMU willn’t hold good.
  • Reasonably large units or normal standard units: The units taken for consumption must be normal standard units and reasonably large units. If they are too small or too large, this LDMU willn’t be applicable. For Example: When a person is thirsty he should consume water in glass not spoon-by-spoon.
  • No changes in the taste, habits and the customs of the consumer: During the course of consumption there shouldn’t be any change in the taste, habits and the customs of the consumer. If there is any change, this law willn’t hold good. For Example: When a vegetarian consumes egg, initially he may not like it and may not get any utility. But gradually when he consumes successive units, he may start getting utility from egg.
  • Cardinal measurability of utility: According to this theory, a person can express the satisfaction he derives from the commodity in quantitative cardinal terms. In other words, utility can be expressed in the form of numbers. Thus, a person can say that he derives 10 utils of satisfaction from the consumption of bread, 90 utils of satisfaction from the consumption of chocolate and so on. However, this may not be true in reality.
  • Constancy of the Marginal Utility of money: This is an important assumption without which Marshall could not have measured Marginal Utilities of goods in terms of money. It states that the Marginal Utility of money remains constant throughout the period when the individual is spending money on a good.
  • The hypothesis of independent utility: This assumption states that the Total Utility which a person derives from a collection of goods purchased is simply the sum total of the separate utilities of goods i.e., separate utilities of different goods can be added to obtain the total sum of the utilities of all the goods purchased.
Example: 10 utils of satisfaction from the consumption of bread + 90 utils of satisfaction from the consumption of pizzas = 100 utils of satisfaction.
  • Rationality: Here the consumer is assumed to be rational. The consumer will prefer to spend money on the commodity from which he will derive maximum utils.

Limitations to Law of Diminishing Marginal Utility (LDMU)

The exponent of the LDMU has himself given few areas where this law wouldn’t be applicable. They are:
  • Rare Collections: The law of LDMU is not applicable to some of the rare collections like stamps, coins, currency of different countries, antique goods etc. because our satisfaction increases with every increase in the stock of these goods.
  • Not applicable to Liquor: The level of intoxication of the drinker increases with every additional drink of liquor.
  • Not applicable for money: The LDMU is not applicable for money. With every increase in the stock of money, the greed goes on increasing.

Criticisms to Law of Diminishing Marginal Utility (LDMU)

The main criticisms of the LDMU are as follows:
  • Cardinal measurability of utility is not possible. Nobody can express their utility in terms of numbers.
  • The LDMU, to some extent applies to money also. For Example: a thousand or five hundred rupees to a millionaire will not make much difference.
  • The LDMU is a single commodity model.

Importance/ Application of the Law of Diminishing Marginal Utility

  • LDMU concept is used to explain “Value Paradox”: This “Value Paradox” was developed by Prof. Adam Smith. This concept is also known as ‘Diamond –water paradox’. He says that water is more useful than diamond, but it is priced low and diamond is less useful than water and it is priced high. This is because more is the quantity or the stock of a product the marginal utility starts diminishing and if the availability of a product is less, marginal utility will be high.
  • Useful for Government to fix the Tax Rate: The value of additional money for a rich person is relatively less. But whereas the value of the same additional money to a poor person is more. Hence the government follows ‘Progressive Tax system’. Government levies high rate tax on rich people and low tax on poor people. For this LDMU could be used.
  • To explain ‘Law of Demand’: When a consumer goes on consuming a particular commodity, the marginal utility goes on diminishing. When the utility that consumer gets is less, the price that he will be ready to offer will also be less. Hence in order to induce the consumer to purchase more, the price of the commodity has to be reduced.
  • Used to explain Consumer Surplus: consumer surplus might be defined as the difference between the price, what consumer is actually prepared to pay and the price that he actually pays. Initially a consumer will be ready to pay more price for a product, gradually the same consumer will be ready to offer very less price for the same product. This is because law of diminishing marginal utility operates over there.

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