This law indicates the familiar behavior of marginal utility, i.e., as a consumer takes more and more units of a good, the additional satisfaction that he derives from an extra unit of the good goes on falling. Marshall stated the law of diminishing marginal utility as follows:

“The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has”.

Suppose a consumer takes nine units of mango one after another. The utility he gets from the second unit of mango will be lesser than the utility he gets from the first unit. Thus, the marginal utility from successive units of mango will tend to decline. It can be observed from Table 1 that the total utility increases at a diminishing rate. When the marginal utility becomes negative, the total utility starts decreasing. This is illustrated in Figure 1.

Table 1 Total and Marginal Utility

Units of Mango    Total Utility (utils)               Marginal Utility (utils)

1                               12                                         12

2                               22                                         10

3                              30                                           8

4                             36                                            6

5                            40                                             4

6                           41                                              1

7                          41                                               0

8                         39                                               -2

9                        34                                                -5

This law is based on two facts. Firstly, while the total number of wants of a man is unlimited, every single want is satiable. Therefore, as an individual consumes more and more units of a good, the intensity of his want for the goods goes on falling, and a point is reached where the individual no longer wants any more units of the good. Secondly, the different goods are not perfect substitutes for each other. When an individual consumes more and more units of a good, the intensity of his particular want for the goods diminishes. But, if the units of that good could be devoted to the satisfaction of other wants and yielded as much satisfaction as they did initially in the satisfaction of the first want, then the marginal utility of the good would not have diminished.

i) Equilibrium Condition

The aim of the consumer is assumed that he should get as much higher satisfaction as possible from his purchases. Thus, the rational behavior of the consumer is to get the maximum total utility. If the marginal utility from the commodity is greater than the price he has to pay, he will buy more of the commodity. If the marginal utility of the commodity is equal to the price of the commodity, i.e., MUx = Px, he will stop his purchase of the commodity. Here, the marginal utility is measured in terms of money. If the price of mango is Re.1 per unit, he will purchase six units of mango. At this point, he is said to be in equilibrium, i.e., he attains maximum satisfaction.

ii) Assumptions of the Law

The utility can be absolutely or cardinally measured.

The tastes of the consumers remain unchanged during the process of consumption.

The money income of the consumer remains the same. Any rise in the money income of the consumer may influence the taste and preference of the consumer towards a particular commodity.

The units of the commodity are homogeneous, i.e., they are alike in size and quality.

There is no time gap between the consumption of the two units of the commodity. In other words, the process of consumption should be continuous without any time interval.

The marginal utility of money remains constant. This assumption becomes necessary because the marginal utility of a commodity is measured in terms of money, and it is desirable that the measure itself should not keep changing. When a person purchases more of a good, the amount of money with him diminishes, and therefore, the marginal utility of money increases. But, this variation in the marginal utility of money is ignored, and it is assumed to remain constant throughout the process of consumption.

The price of substitute goods remains constant. For example, apple and orange are substitute goods to each other. When the consumer purchases apple, the price of its substitute, orange, should remain constant. This assumption is necessary because of the fact that the marginal utility of apple decreases when the quantity of the substitute (orange) to be consumed by the consumer increases. The demand for consumption of orange will rise when its price comes down. Hence, it is assumed that the prices of substitutes remain unchanged throughout the process of consumption.

iii) Limitations

There are certain commodities for which the marginal utility does not diminish with every increase in the stock of them, E.g., collection of stamps and ancient coins, consumption of liquor, and so on.

The utility of a commodity to a person depends on the quantity of that commodity possessed by others. Suppose in a particular locality, a person has two cars, and his rival has only one car. Then the latter’s desire for the second car will be stronger than that of the first car.

The law will not hold good in case of misers. The more money he gets, the greater will be his desire for the additional units of money that he gets.

However, careful consideration will show that after a certain stage even the marginal utility of liquor, collection of the same type of stamps and coins, cars, money, etc., will start declining and ultimately become negative. Thus, in reality, there is no exception to this law as it has universal application in all cases of consumption.

iv) Importance of the Law

• This law enables us to derive the law of demand. The law of demand states that larger quantities of a commodity would be bought at a lower price than at a higher price. The reason is that as more and more units of a commodity are purchased, its marginal utility to the consumer becomes less and less, and he progressively gives lesser importance to additional units of the commodity. He will, therefore, buy additional units of the commodity only at a lower price. The law of demand is, thus, derived from the law of diminishing marginal utility.
• This law is useful in regulating that consumption expenditure. If the marginal utility of the commodity is equated to its price, then the consumer attains maximum satisfaction.
• The marginal utility of money to rich people will be smaller than the marginal utility of money to poor people. So, incomes of rich people are taxed at a progressive rate for which the law of diminishing marginal utility offers the basis.
• With the help of the marginal utility concept, we can explain the difference between value-in-use and value-in-exchange. This can be explained by the diamond-water paradox. The price of a commodity is governed by its marginal, not total utility. The total utility of water may be infinite on account of its relative abundance, but its marginal utility is zero. Hence, water commands a lower price. On the contrary, the total utility of diamonds may be low, but its marginal utility is very high on account of its relative scarcity. Hence, a diamond commands a higher price.