Law of Diminishing Marginal Utility
Utility may be defined as the power of commodity or services which satisfies the human wants .It is a psychological feelings when a consumer consumes a commodity she/he gets some benefits in the form of satisfaction which referred as utility.
Summary
Utility may be defined as the power of commodity or services which satisfies the human wants .It is a psychological feelings when a consumer consumes a commodity she/he gets some benefits in the form of satisfaction which referred as utility.
Things to Remember
- The law of diminishing marginal utility expresses the universal human experience.
- Law of diminishing marginal utility was first defined by a German economist Herman Heinrich Gossen in 1854.
- This law of diminishing marginal utility is known as the first law of Gossen and later on, it was popularized by Alfred Marshall.
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Subjective Questions
Q1:
Describe the concept of Taylor's scientific management.
Type: Short Difficulty: Easy
<p>Taylor started as a worker in Midvale Steel Company and he was promoted to chief engineer. Later he joined Bethlehem Steel Company. After his retirement, he worked as a consulting engineer. His vast experience of managing people led him to experiment and understand how to manage a company in the most scientific manner. He experimented how to increase an efficiency of manpower and get maximum profit.</p>
<p><em>According to F.W Taylor- “Scientific Management means knowing exactly what you want men to do and seeing that they do in the best and the cheapest way”</em></p>
<p>So we can understand that scientific management is the art of knowing what is to be done and how it is to be done. It is a logical approach towards the solution of management problems. </p>
Q2:
Explain the principles of Taylor's scientific management.
Type: Long Difficulty: Easy
<ol>
<li><strong>Science, not a rule of thumb:</strong> The first principle of the scientific management aims to adopt the scientific way of management rather than the rule of thumb approach. So this principle suggests there must be scientific analysis and study of any job and only after the investigation, an action should be conducted. The decision should be made on the basis of facts, not on the basis of opinions and beliefs.<br /><br /></li>
<li><strong>Harmony, not discord:</strong> In the process a management there is a relationship between a manager and an employee. There will be a personal interest of the employee and there will be organizational interest. So this principle states that both this interest should go side by side. There must be a harmony of interest. It should be focused towards attaining the organizational goals with mutual benefit of both the employee and the organization.<br /><br /></li>
<li><strong>Co-operation, not individualism:</strong> According to this principle there should be a feeling of co-operation between the manager and the labor. It requires the change of mental attitudes and the change of management towards each other. When there is co-operation between them, the size of profit will increase and the is no chance to quarrel about the distribution of profits.<br /><br /></li>
<li><strong>Maximum output:</strong> According to this principle, a business organization must always be focused towards maximizing the profit and productivity. There should be an optimum utilization of resources. maximum output and optimum utilization of resources will bring higher profit for the employer and better wages and salaries for the employees.<br /><br /></li>
<li><strong>Division of responsibility:</strong> This principle divides the role of planning and executing among the employer and the employee. The employer should be given the role of only planning and the employee should focus on only operating to execute the plans due to this there will be no confusion regarding their roles and there will be a smooth operation of action. <br /><br /></li>
<li><strong>Development of employees:</strong> According to Taylor, there must be a scientific selection of human resources and once they are selected they must be trained and developed in such a way that they can work to their maximum capacity for the organization. Trained employees increase their satisfaction and increases the productivity.</li>
</ol>
Q3:
What are the limitation of Talyor scientific management?
Type: Long Difficulty: Easy
<ol>
<li><strong>Focus only on Employees:</strong> Taylor’s scientific management gives too much emphasis to the workers. In a way, it is also criticized that it exploits the workers and there is no wage rise system along with a rise in the productivity. It does not address other problems that might come up in an organization.<br /><br /></li>
<li><strong>No best way:</strong> Taylor’s scientific management tries to find the best solution to run an organization. But in practice, there is not the best way to run an organization because there are many employees of different background and perspectives. So all cannot be treated in the same way. <br /><br /></li>
<li><strong>Separation of planning and doing:</strong> Planning and executing are separated in Taylor’s scientific management. But in practice planning and executing are closely related and both cannot be separated.<br /><br /></li>
<li><strong>Monotonous and Frustration:</strong> In Taylor’s scientific Management focuses on the specialization and repetition jobs to increase the productivity. But this reduces the innovation and creativity of the workers. There is monotonous and dullness which can cause mental fatigue. <br /><br /></li>
<li><strong>Ignores Human Factor:</strong> The scientific management of FW Taylor neglects the human factor because this principle believes that employees are only motivated by money. But this is not true in all the cases. Human beings are motivated by other factors as well such as human dignity, moral values, respect, and care etc. So the Scientific Management of Taylor neglects the human side of Labor.<br /><br /></li>
<li><strong>Supply without considering Market Demand:</strong> According to Taylor, maximizing production helps in maximizing sales which eventually leads to high profit. But it is not true as the supply must be made with consideration to the demand of the market. If supply is more than the demand then there will be over utilization of resources and inventory cost will increase. So supply and production should be carried out considering the market demand.</li>
</ol>
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Law of Diminishing Marginal Utility
Law of Diminishing Marginal Utility was first defined by a German Economist Herman Heinrich Gossen, in 1854. This law is known as The First Law of Gossen and later on, it was popularized by Alfred Marshall.
In 1854, H. Gossoon explained this law after Alfred Marshall in the following words, “ Other things remaining same, marginal utility becomes smaller and smaller as the more units of a commodity a person has.”
According to Alfred Marshall, ' The Law of Diminishing Marginal Utility is defined as the additional utility which a person derives from an increase of his stock of a commodity diminishes with every increase in the stock that he or she already has.”
This law says that the additional level of satisfaction goes on diminishing with every increase in units of consumption within the same period of time. When a consumer consumes more and more units of the same commodity, the successive level of utility diminishes.
ASSUMPTIONS
The Law of Diminishing Marginal Utility is based upon the following assumptions:
- The consumer should be rational:
The consumer is regarded as the rational person who aims to maximize their satisfaction with their perfect knowledge required to maximize the satisfaction of the constraints imposed by their income and commodities.
- Cardinal measurement of utility:
The consumption utility of any commodity can be measured. It is assumed that the satisfaction can be measured in the same way that the natural units of consumption can be calculated.
- Constant Marginal utility of money:
This theory assumes utility can be measured in terms of cordial number. The basis of measurement of utility is money. Money is the measuring rod of utility. Being a measuring rod of utility, the marginal utility of money remains constant over the period of consumption.
- Homogeneous units of goods:
The units of goods consumed by the consumer must be identical size. i.e homogeneous and same quality. otherwise, the law will not apply.
- No change in task and preferences of the consumer:
It is required that the preference of the consumer do not change. Only then we can assume that the marginal utility declines as consumption increase.
The Law of Diminishing Marginal Utility can be explained by means of a numerical table and geometrically with a diagram which is given below:
| Units of good 'X' | Total Utility | Marginal Utility |
| 0 | 0 | 10 |
| 1 | 10 | 8 |
| 2 | 18 | 6 |
| 3 | 24 | 4 |
| 4 | 28 | 2 |
| 5 | 30 | 0 |
| 6 | 30 | -2 |
| 7 | 20 | -4 |
The given table shows that a consumed goes on consuming goods the additional utility or marginal utility that the consumer obtained by consuming each successive unit of goods of 'x' goes on decreasing till it goes down to zero at the sixth unit and it becomes negative with the 7th unit. The total utility goes on increasing until the consumption of 5th unit and in the 6th unit the total utility stays constant but decreases in the 7th unit. The total utility increases at a diminishing rate. It is due to the diminishing marginal utility that the total utility increases at a decreasing rate.
In the figure, MUx is the marginal utility curve, which is derived on the basis of an individual consumption of successive units of good 'X'. MUx is downward sloping curve which means successive goods 'X' goes on declining throughout below the X-axis which indicates negative utility.
When the marginal utility is positive the total utility increases at a decreasing rate by upward sloping portion of the total utility curve TUx. Total utility is maximum where the marginal utility is zero. At the 6th unit, marginal utility becomes zero with the state of maximum satisfaction and total utility of 6th unit is 30. When marginal utility becomes negative, the total utility curve starts to fall by the downward sloping portion of TUxcurve.
LIMITATIONS OF THE LAW
The Law of Diminishing Marginal Utility is based on certain assumptions. In most of the time, these assumption are applicable. The law is not applicable in the case of the following situations:
- Rare and curious goods
In the case of rare goods such as old stamps, old coins, Yarsagumba, etc., the marginal utility goes on increasing rather than decreasing. So, the law does not hold true in this kind of situaion.
- Habitual goods
Several consumers may be habitual with different goods like cigarettes, alcohol, etc. When consumer consumes more and more units of such good, additional level of satisfaction goes on increasing rather than decreasing.
- Not applicable in cost of irrational consumer
The law assumes the consumer is a rational person. He aims to maximize his utility. The theory is applicable in a case of only rational consumer. However, it is very difficult to find the rational consumer as expected by the law.
- Utilities cannot be measured in cardinal number
This theory assumes that the satisfaction can be measured in units but,the critics said that utility is an internal feeling of the consumer and it differsfrom person to person. So, it cannot be measured in number. But it can rank like more or less.
- Time gap in consumption
The law assumes the consumer consumes various of a commodity continuously in a short period of time. Therefore, the law is not applicable if the consumer consumes the commodity in a long period of time with breaks or gaps.
- Changing taste and preference
The law is applicable if and only if the taste and preference of the consumer remain constant. In the case of changing taste and preference, the law is no applicable.
- Goods of entertainment
The law of diminishing marginal utility is not applicable in the case of goods of entertainment activities like watching movies, T20cricket etc. The further watching of these provides entertainment and thus satisfaction does not decrease.
- Public goods and basic goods
People consume various public goods like road, street, light, etc. Likewise, they consume many basic goods like food, clothes, etc. In the use of these goods, the level of satisfaction from additional unit does not decrease. So, it is against this law.
IMPORTANCE OF LAW OF DIMINISHING MARGINAL UTILITY
- MGuidelines for taxation
It guides the finance minister while formulating the tax policy. A progressive tax policy, high tax for high-income people and low tax for low-income people, is based upon the marginal utility theory.
- Basic for price determination
When a marginal utility is at least equal to its price,consumer desire to purchase the goods. The consumer will pay a higher price for those having higher MU and vice-versa.
- Guidelines for the distribution of national wealth
The distribution of wealth and national income should be done as per the guidelines of MU theory. Since, the demand of rich people beyond certain has a diminishing utility whereas if the government distribute the wealth to poor, it has definitely a higher marginal utility.
- Basis for various laws in economics
Various laws in economics are based on a law of diminishing marginal utility. For example, law of demand, a law of substitution etc. These laws are derived from the law of diminishing marginal utility.
- Basis for consumer expenditure:
This law is important to regulate the expenditure of the consumers. The consumer has a limited amount of budget with them. So, they do not waste budget by purchasing more qualities. They stop their further purchase at a point where MU equal to price.
(Karna, Khanal, and Chaulagain)(Khanal, Khatiwada, and Thapa)(Jha, Bhusal, and Bista)
Bibliography
Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.
Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.
Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.
Lesson
Theory of Consumer Behaviour
Subject
Economics
Grade
Grade 12
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