The law of diminishing marginal utility describes a familiar and fundamental tendency of human behavior. The law of diminishing marginal utility states that:
“As a consumer consumes more and more units of a specific commodity, the utility from the successive units goes on diminishing”.
Mr. H. Gossen, a German economist, was first to explain this law in 1854. Alfred Marshal later on restated this law in the following words:
“The additional benefit which a person derives from an increase of his stock of a thing diminishes with every increase in the stock that already has”.
The law of diminishing marginal utility is based upon three facts.
- Total wants of a man are unlimited but each single want can be satisfied. As a man gets more and more units of a commodity, the desire of his for that good goes on falling. A point is reached when the consumer no longer wants any more units of that good.
- Different goods are not perfect substitutes for each other in the satisfaction of various particular wants. As such the marginal utility will decline as the consumer gets additional units of a specific good.
- The marginal utility of money is constant given the consumer’s wealth.
Assumption of law of diminishing utility are:
- Rational behavior of consumer
- Constant marginal utility of money
- Diminishing marginal utility
- Utility is additive
- Consumption to be continuous
- Suitable quantity of a commodity
- Characteristics of the consumer does not change
- No change of fashion, customer, tastes
- No change in the price of commodity