THE LAW OF DIMINISHING MARGINAL UTILITY

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The law of declining marginal utility states that ceteris paribus, as consumption rises, the marginal utility obtained from each extra unit decreases.

Hermann Heinrich Gossen first proposed the law of diminishing marginal utility in 1854.

For this reason, the law of diminishing marginal utility is often known as the first law of Gossen

However, in his 1890 book "principle of economics," Alfred Marshall popularized the law of diminishing marginal utility, writing, "During consumption, as more and more units of a commodity are used, every successive unit gives utility at a diminishing rate, provided other things remain the same; however, the total utility increases."

To further understand the law, let's take Apple as an example

When you eat your first apple, you will get the maximum utility possible.

If you consume a second apple you would also get some satisfaction. 

However, the satisfaction you obtained from the second will likely be lesser than the first.

Consuming the third apple would give you even lesser satisfaction. 

After the sixth apple, you would probably feel disgusted by the idea of an apple. 

However, we must realize that the law of diminishing marginal utility is based on the following assumption.

1. The consumer is rational

2. Units of the commodity consumed must be homogenous.

3. There is a cardinal measurement of utility.

4. The taste and habit of a consumer are held constant.

5. There is no time lag in the consumption of successful units of a goods

Limitations Of The Laws Of Diminishing Marginal Utility

The law of diminishing marginal utility does not hold:

1. If the goods are heterogeneous

2.  for scarce commodities like gold and diamonds

3.  For money

4. If consumer income or taste changes 

Importance Of The Law Of Diminishing Marginal Utility

1. Useful to consumers: According to the law of diminishing marginal utility, consuming successive units of goods reduces satisfaction.

Based on this, a consumer will spend his/her money on goods and services that maximize his utility.

Furthermore, the law of diminishing marginal utility tells a consumer when he is to stop spending on goods.

As a rule of thumb, the consumer stops spending when marginal utility equals price.

2. Basis of most economic concepts: The law of demand and consumer surplus are all based on the law of diminishing marginal utility.

3. Basis of price determination: An increase in supply lowers the price. This is based on the law of diminishing marginal utility.

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