Livestock Economics, Marketing and Business Management

LAW OF DIMINISHING MARGINAL UTILITY (MARSHALLIAN APPROACH)

• "The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in stock that he already has."

Assumptions

• The consumer is assumed to be rational.
• Cardinal utility – The utility of each commodity is measurable in monetary units.
• Money has a constant marginal utility.
• Utilities of different commodities are independent of one another.
• Taste and income of the consumer remains the same.
• Commodity is consumed in suitable size and in suitable time.
• There is no change in fashion.

Importance of the law

• The law helps us to derive the law of demand.
• Marginal utility of money to rich people will be smaller than the marginal utility of money to poor people.
• So, the income of the rich people is taxed at a progressive rate.
• Law of diminishing marginal utility is the basis for progressive tax system.
• This law governs our daily expenditure. Our purchase stop at a point where marginal utility equals price.