State and explain the law of diminishing marginal utility with its assumptions.

Answer: Marginal utility of a commodity diminishes as a consumer consumes more and more units of it, other things being constant.

Statement: Prof. Alfred Marshall stated: “Other things being equal, 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.”

Explanation: Human wants are unlimited, but a single want is satiable. As a consumer consumes successive units of a commodity, the intensity of his want falls, so the utility from each additional unit (marginal utility) goes on falling. Total utility rises at a diminishing rate, reaches a maximum when MU = 0 (point of satiety) and then falls when MU becomes negative.

[Diagram: units of the commodity on the X-axis and utility on the Y-axis. The TU curve rises at a diminishing rate, reaches its maximum at the 6th unit and then falls. The MU curve slopes downward from left to right, touches the X-axis at the 6th unit (MU = 0) and goes below the X-axis (negative MU) at the 7th unit.]

The schedule shows that MU falls with every additional unit. At the 6th unit TU is maximum and MU is zero; at the 7th unit MU is negative (disutility) and TU falls.

Assumptions:

1. Rationality: The consumer is rational and aims at maximum satisfaction.
2. Cardinal measurement: Utility can be measured in cardinal numbers (utils).
3. Homogeneity: All units of the commodity are identical in size, quality, taste, etc.
4. Continuity: The units are consumed one after another without a time gap.
5. Reasonable size of units: The units are of a standard, reasonable size (not too small or too large).
6. Constancy: The consumer’s income, tastes, habits, preferences and the price of the commodity remain constant.
7. Constant marginal utility of money: The MU of money remains the same.
8. Single want: The commodity satisfies a single want of the consumer.

Exceptions/criticism: The law may not apply to hobbies (stamps, coins), misers (money), drunkards, and to music or poetry; utility also cannot actually be measured cardinally.