Diminishing Marginal Utility and Consumer Equilibrium

Marginal utility refers to the utility derived from the consumption of an additional unit of a commodity. It is of utmost importance in demand analysis of the consumers. The utility refers to the power of satisfying consumer's wants.

Alfred Marshall propounded the law of diminishing marginal utility..He stated that as the consumption
increases the marginal utility derived from the each successive units
tends to decline. The consumer is less willing to sacrifice one good to
consume one more additional unit of another good at a higher level of
consumption.

Law of marginal does not hold true in case of readers, misers and hobbies as the consumption increases the marginal utility derived from the each successive units
tends to rise. For example, if a person's hobby is to collect stamps, then the marginal utility derived by collecting one more unit of stamp will rise.

To uphold the law of marginal utility, the reasonable sized units are to be consumed. The law of marginal utility states that as consumption increases, the marginal utility derived from each successive units tends to decline.

The law of diminishing marginal utility states that as the consumption
increases the marginal utility derived from the each successive units
tends to decline. The consumer is less willing to sacrifice one good to
consume one more additional unit of another good at a higher level of
consumption.

The law of diminishing marginal utility states that as the consumption
increases the marginal utility derived from the each successive units
tends to decline. The consumer is less willing to sacrifice one good to
consume one more additional unit of another good at a higher level of
consumption.

The law of diminishing marginal utility states that as the consumption increases the marginal utility derived from the each successive units tends to decline. The consumer is less willing to sacrifice one good to consume one more additional unit of another good at a higher level of consumption.

The Law of Diminishing Marginal Utility was given by Alfred Marshall. According to the theory, the marginal utility of a consumer goes on falling as he/she consumes more and more of  a product.

Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or service.

The assumptions of this Marshallian approach of consumer behaviour are:

1. Marginal utility of money is constant.

2. Utility is cardinally measurable which means that the utility or satisfaction of a consumer can be measured in terms of cardinal numbers.

3. The consumer is a rational human being.

According to the concept of ordinal utility approach, it is impossible to measure utility in absolute terms and thus it cannot be compared. The reason for it being that it is a psychological phenomena. However, according to the ordinal utility theorists, a consumer can rank various combinations of goods and services according to his preference. 

Substitution of goods is not an assumption under law of DMU, because if one good substitutes for another then law of DMU will not remain applicable.

The negative slope of the marginal utility curve reflects the law of diminishing marginal utility. The marginal utility curve also can be used to derived the demand curve. 
The marginal utility curve is negatively sloped. It decreases as the number of rides increases. Each additional ride adds less utility that the preceding one.

Law of diminishing marginal utility states that with the increase in consumption, the marginal utility gets decreased .This happens because in two commodity case a consumer is willing to sacrifice less of one good for consuming an additional unit of another good.

One of the assumption of law of diminishing marginal utility is that the consumption should be continuous. For example, to hold the law of diminishing marginal utility a consumer should consume ice-creams continuously at a particular point of time.

Law of diminishing marginal utility is applicable to the goods which are consumed by the consumers. The law states that as the consumption of a good increases, the marginal utility tends to decline as the consumer is willing to sacrifice much lesser amount of one good in order to consume one additional unit of another good.

• There are various exception to the law of diminishing marginal utility like in case of money.
  
• We cannot measure our satisfaction in cardinal numbers, we can only measure it as high or low depending upon the product.
  
• Consumers consume various commodities, therefore even if the utility of a commodity is high the consumer can switch to some other similar product whose price is low to attend equilibrium. So the consumer anyway attains equilibrium due to feasibility to various products.
  

According to the law of diminishing marginal utility as the consumption increases the marginal utility tends to fall. Consumer's surplus is a phenomenon where the marginal utility derived from a product is greater than the price per unit of that product.

The Equi-Marginal Utility theory states that consumers will maximise total utility from their incomes by consuming that combination of goods where:

$\dfrac{MU _a}{MU _b} =$ $\dfrac{P _a}{P _b}$

For example, suppose bread = Re.1 and Rice = Rs.2.

• Rice is twice as expensive as bread. Therefore, it would make sense to choose a quantity of rice, where the marginal utility of rice was twice the MU of bread. Therefore, you would tend to buy such a quantity of rice so as to make sure the marginal utility of rice justifies its higher price.
• If rice was giving three times as much marginal utility but was only twice as expensive, it would make sense to buy more rice until the marginal utility fell to that ratio.

Law of diminishing marginal utility is based on psychological law that as more and more units of a commodity is consumed, marginal utility derived from every successive unit will decline in respect to all goods with a few exception.

Diminishing marginal utility focuses on how satisfaction level on an individual keeps on decreasing as he consumes more and more units of a commodity which is applicable on all goods and situations except in case of money.

Diminishing marginal utility states that when a consumer goes on consuming a standard unit of a commodity, the additional utility in every successive unit of consumption keeps on diminishing. It is based on the assumption that the consumer needs to consume a standard unit of the commodity.

When the commodity consumed by a customer increases it is the normal psychological affect that the satisfaction which that commodity is providing to the customer will decrease. Therefore, for every extra unit of consumption of a commodity, marginal utility derived will decrease.

Diminishing marginal returns to labour occurs when the marginal production starts to diminish with increase in the amount of labour used in the production process. This leads to increase in total production at a diminishing rate and a situation may come when the total output is maximized and then tends to fall. 

The utility of a good is often dependent on the availability of substitutes (which provide alternatives) and complements (which are used together).

The doctrine (principle) of consumer surplus is based on the law of DMU.

A rational consumer is considered to be that person who makes rational consumption decisions.

 In other words, the consumer who makes his choices after considering all the other alternative goods (and services) available in the market is called a rational consumer.

In law of diminishing marginal utility, rationality of consumers refer to the situation when consumers take
decisions with reason and logic and without any bias.

Law of diminishing marginal utility states that as consumer will increase its consumption of a commodity, the marginal utility derived from every successive unit of consumption will decrease and a situation may come when marginal utility is zero or negative. 

• Alfred Marshall was a British economist who developed most of the modern economic theory including utility analysis.
  
• John Hicks was a British economist who criticized the utility theory and developed a newer theory on consumer behaviour known as the indifference curve theory. 
  

Rationality of consumers refer to the situation when consumers take
decisions with reason and logic and without any kind of bias. When the consumer takes rational
decision they try to get highest satisfaction by spending least amount
of money.

Constant marginal utility of money means that the utility per unit of money remains unchanged for the consumer. This implies that each additional unit of money provides the consumer with the same level of satisfaction. This leads to the use of money as the measuring rod in utility analysis. 

According to the consistency theory, consumer will not change his preferences in another time period. So if he prefers commodity A over commodity B then he will never prefer B over A. It is one of the assumption of ordinal utility theory analysis.

Law of diminishing marginal utility states that as consumer will increase its consumption of a commodity, the marginal utility derived from every successive unit of consumption will decrease and a situation may come when marginal utility becomes zero or negative. 

Consumer equilibrium will be achieved only when MU diminishes as more units of a commodity are consumed. In case MU tends to rise, consumption of a commodity will never reach to an end. Thus, determination of equilibrium will never be possible.

• The law of equi-marginal utility is an extension of law of DMU. It states that with the limited that a person has, he aims to spend it on different commodities and earn maximum and equal satisfaction from them. 
  
• He should such a combination of goods so that the utility derived from the last unit of the goods are the same. 
  
• Thus, it aims to establish equilibrium at that point where the consumers gets maximum satisfaction by consuming a particular combination of goods. 

The law of equi-marginal utility is based on the law of diminishing marginal utility. The equi-marginal principle states that a consumer will be maximizing his total utility when he allocates his fixed money income in such a way that the utility derived from the last unit of money spent on each good is equal.

 A rational consumer substitutes some units of the commodity of greater utility to some units of the commodity of less utility. The result of this substitution will be that the marginal utility of the former (commodity with greater utility) will fall and that of the latter will rise, till the two marginal utilities are equalized.

According to the law of equi-marginal utility, a consumer is said to be in equilibrium when the ratio of the marginal utilities of the two commodities and their respective prices are equal. This means that the MU of the last rupee spent on each commodity is the same.

The equation it should satisfy is: MU_X /P_X = MU_Y/P_Y

Hermann Heinrich Gossen was a Prussian economist who propounded the law of equilibrium marginal utility.
The law of equilibrium marginal utility states that the consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee spend on each good is equal. In other words, consumer is in equilibrium position when marginal utility of  money expenditure on each goods is the same.

In real life, consumers do not act rationally while measuring the utility of the product which they are purchasing. Consumers ignore to compare the price and utility of different commodities, due to which they cannot make a rational decision. Moreover, the law of equi-marginal utility does not hold good in case of indivisible goods because comparison is not possible.

In real life situation, Law of equal marginal utility is very unrealistic because it is very irrational on the part of the consumer to measure his satisfaction in cardinal number to find the utility he is deriving from a product and then comparing it to the price of the product.

In equal marginal utility case the consumer tries to match the utility which he is getting from a standard unit of a commodity with the price that is prevalent in the market with other factors remaining constant to achieve equilibrium.

When consumer
consumes two commodities and their prices are the same, then equilibrium is achieved when consumer equates marginal utility derived from one commodity with the marginal utility derived from another commodity.