“A change in total amount of utility by consuming an additional unit of a good is called marginal utility. Marginal utility contains two laws according to those it has to be calculated. These laws are explained as Law of Diminishing Marginal Utility and Law of Equi-Marginal Utility".
Law of Diminishing Marginal Utility:
This law is based on human physiology to consume goods. Law has been created according to the marshal’s words. “Other things remain same, marginal utility starts diminishing at every unit of a good which is consumed additionally.
Explanation with the help of Table:
As we can see in the table that the level of satisfaction through first unit of orange is 20. Then another unit is consumed. According to the table the satisfaction level of second unit is 15. So we find a sudden decrease in the level of satisfaction due to the consumption of an additional good. Consuming additional units continuously cause the level of satisfaction to reach its maximum level, at this stage marginal utility become equal to 0 as we can see in the table. At this stage if an additional unit is consumed it will cause total utility to start decreasing and marginal utility will become negative.
There are some assumptions of the law, which make it workable.
- There should be continuous consumption of good.
- No change should occur in the income of the consumer.
- There should be no difference in the quality of commodity.
- Good must be dividable into small units for proper consumption.
- The commodity in use should be in reasonable unit.
- During the consumption of good there should be no change in the mind set of consumer.
Limitations of the Law:
- If the wealth of a greedy person increases its level of satisfaction will also increase. At this situation law of diminishing marginal utility is not applicable.
- Level of satisfaction for the sake of knowledge never diminishes.
- This law does not apply on acquiring precious and rare goods.
- This law is not applicable on habits. For example: gathering coins, reading books etc.
This law does not apply on addiction such as wine or some other sorts of drugs.