Limitations and Importance of Law of Diminishing Marginal Utility

Law of Diminishing Marginal Utility

Law of Diminishing Marginal Utility

It our common observation that when units of a commodity used continuously the lateral units give less and less satisfaction. In the beginning we have strong desire to use unit’s commodity but with the continuous use the desire for commodity to use diminishes, as the want is satisfied. When the want is satisfied utility reaches to zero and then with the excessive use of units of commodity the utility becomes negative. The law of diminishing marginal utility expresses the relationship between the units of a commodity consumed and the MU of each unit of the commodity.

LIMITATIONS

Knowledge

The law does not apply on knowledge as a person acquires more and more knowledge his desire for knowledge increases e.g. the knowledge of different language gives more and more utility for a person.

Income and wealth

It  argued that as income of a person increases his desire to earn more income increases, because more income means more wants.

Rare Collection

The law does not apply to rare collections. A person who  collecting old stamps, the more, he is able to collect stamps, the greater will be his satisfaction.

Fashion/Showment/ Ostentation

Utility of a commodity depends upon fashion, showmen and ostentation. A dress in fashion or used for showmen or ostentation has greater utility and a dress out of fashion has less utility.

Intoxicants

The law does not hold well in case of intoxicants. A person who is addict of intoxicants his utility for successive units increases.

IMPORTANCE

For consumer

Consumer benefits from this law while purchasing goods. When a consumer purchases goods he compares the MU of the commodity purchased and the price paid. If the M.U is greater than the price, the consumer purchases more and stop purchasing when M.U is equal to price.

For Taxation/ Finance Minister

We know that M.U of money for rich is less than the poor. The law provides the basis for taxation. The finance minister while imposing taxes or changing the tax rates benefits from this law. Higher tax rates imposed on rich and lower tax rate on poor because M.U of money for poor is more whiles less for riches.

Price Determination

The law forms a basis of theory of values. It explains how with an increase in supply (demand remain the same) the values of commodity falls.

Values in Exchanges

The law explains which commodities have value in exchange. Air has value in use but no marginal utility while goods have value in exchange because they possess MU.

Basis for some Economic law /Theories

Economics laws e.g. law of equi-marginal utility has been derived from this law. The concept of elasticity of demand, consumer surplus depends upon this law.

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