Question

Discuss and illustrate the law of diminishing marginal utility

Answer 1

Answer:

According to law of marginal utility, as we consume more and more units of a commodity then the utility derived from each successive unit goes on diminishing.

Explanation:

Terms:

utility : want satisfying power of a commodity.

marginal utility : addition to total utility when one more unit of a commodity is consumed.

assumptions of law of diminishing marginal utility :

> consumption of reasonable quantity

> continuous consumption

> no change in quality

> rational consumer

> price of the commodity remains constant

Answer 2

Answer:

LAW OF DIMINISHING MARGINAL UTILITY:

• The law of diminishing marginal utility was explained by Gossen in 1854.
• Jevons called it as Gossen's first law.

MEANING:

• The law says that as a consumer takes more units of a good, the extra satisfaction that he derives from extra unit of a good goes on falling.
• The relationship between quantity consumed and utility derived from each successive unit consumed is called the law of diminishing marginal utility.

ASSUMPTIONS:

1. Rationality
2. Marginal utility for money
3. No time lag
4. Cardinal measurement
5. Full knowledge of the market

TOTAL UTILITY: It is the sum of all the utilities which are derived from the consumption of a commodity.

MARGINAL UTILITY: It is the extra satisfaction derived from the consumption of an additional unit of the same commodity.

ILLUSTRATION OF THE LAW:

A consumer consumes x commodity and by having more and more units of it, his MU will diminish.

The relationship between total utility and marginal utility is explained in three ways. They are:

1. When total utility increases at a diminishing rate, marginal utility falls.
2. When total utility is maximum, marginal utility becomes zero.
3. When total utility decreases, marginal utility becomes negative.

[Refer to the attachment for graph]

LIMITATIONS:

1. The consumer is not always rational.
2. Marginal utility if money is not constant.
3. If goods are not homogeneous, this law will not work.
4. if there's any change in consumers income or tastes, this law doesn't hold good.