Two techniques are used in the
analysis of consumer’s behavior.
Utility analysis: Marshallian or cardinal
approach.
Indifference curve
technique:
Modern of ordinal approach.
Here the utility analysis
(Marshallian approach) has been discussed. In view of this two laws. Law a
Diminishing Marginal Utility (DMU) and law of Equimarginal Utility (EMU) have
been explained in next topics.
Utility Analysis: Law of
Diminishing marginal Utility (DMU)
Dr. Marshall states this,
law as follow: The additional benefit which a person derives from a given
increase of his stock of anything diminishes with the growth of the stock that
he has another words the law of DMU simply states that other things being
equal, the marginal utility derived from successive units of a given commodity
goes on decreasing. Hence the more we have of a thing; the less we want of it,
because every successive unit gives less and less satisfaction.
The law is explained with
the help of following example
|
Units of commodity No. Of mangoes |
Total Utility (TU)
|
Marginal Utility
(MU)
|
|
1
|
3
|
8
|
|
2
|
14
|
6
|
|
3
|
16
|
2
|
|
4
|
16
|
0
|
|
5
|
14
|
(-) 2
|
It
will be better to know some terms for understanding the law and they are.
Initial
Utility: It is the utility of the initial or the first unit. In the table
initial utility is 8
Total
Utility: In column 3 of the table, it gives the total utility at each step.
For example it you consume on mango are total utility is 3, if you consume two
mangoes, the total utility is 14.
Zero
Utility: When the consumption of a unit of a commodity makes no addition to
the total utility, then it is the point of zero utility. In our table, the TU
after the 3rd unit is consumed is 16 and ar the 4th also it is 16. Thus, the
4th mango results in no increase. Thus is the point of zero utility. It is seen
that the total utility is maximum when the MU is zero.
Marginal
Utility: The addition to the total utility by the consumption of the last
unit considered just worthwhile. The can be worked out by using following
formula.
Negative
Utility: It the consumption of a unit of a commodity is carried to excess,
then instead of giving any satisfaction, it may cause dissatisfaction. The
utility in such cases is negative. In the table given above the marginal
utility of the 5th unit is negative.
Assumptions:
The assumptions of the law of DMU are:
·
All the units of the given commodity are
homogenous i.e. identical in size shape, quality, quantity etc.
·
The units of consumption are of reasonable size.
The consumption is normal.
·
The consumption is continuous. There is no
unduly long time interval between the consumption of the successive units.
·
The law assumes that only one type of commodity
is used for consumption at a time.
·
Though it is psychological concept, the law
assumes that the utility can be measured cardinally i.e. it can be expressed
numerically.
·
The consumer is rational human being and he aims
at maximum of satisfaction.
Exceptions:
The exceptions to the law of DMU are as follows:
Hobbies:
In case of certain hobbies like stamp collection or old coins, every addition
unit gives more pleasure. MU goes on increasing with the acquisition of every
unit.
Drunkards:
It is believes that every does of liquor Increases the utility of a drunkard.
Miser:
In the case of miser, greed increases with the acquisition of every additional
unit of money.
Reading:
reading of more books gives more knowledge and in turn greater satisfactions.
Importance
of the law of DMU:
Basic
of economic law and concepts: This law of DMU forms the basis of law of
demand, law of Equimarginal utility, elasticity of demand etc.
Public
finance: The Govt. can impose and justify progressive income tax on the
ground of this law, as the income increases, the MU of income diminishes.
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