The law of diminishing marginal utility

The law of diminishing marginal utility can be traced back to the writings of Gossen and Bentham.

 According to this law, as a person purchase more and more units of a commodity its marginal utility goes on declíning. In the words of Prof. Boulding. "As a consumer increases the consumption of any one commodity, keeping constant the consumption of all other commodities, the marginal utility of the variable commodity must eventually decline." The law points out that the marginal utility of a commodity depends upon its quantity, but is not proportional to its quantity.The marginal utility of the commodity to the consumer depends upon the volume of the stock purchased by him. The larger the stock purchased by him, the smaller is the utility derived from an additional unit of commodity. The law can be formally stated thus : "As the quantity of a commodity possessed by a person at any time increases, its marginal utility to him diminishes." It should, however, be remembered that the law of diminishing marginal utility says nothing about the rate of decline or marginal utility. It does not specify whether the marginal utility diminished at a slow or a fast rate or whether it declines at a uniform or a variable rate. 

The law of diminishing marginal utility can also be expressed in another way. When the consumer has only a little of a particular commodity, he puts it to the most urgent use. As he gets more and more of it, he begins putting it to less and less urgent uses. In the words of Baumol, this is so, "because we give priority to more highly valued uses: if we have only one piece of cake, we give it to our child; ifwe have two, we give the second to our wife; a third we keep for ourselves and fourth we give to our mother-in-law." 

It should be clearly noted that when a person buys more and more units of a commodity or puts it to less and less urgent uses, the marginal utility derived therefrom has to diminish. It cannot increases. If the marginal utility were to increase with purchases of additional units of the commodity, then the consumer would spend his entire income on that commodity alone. As he purchases the first unit, it implies that the utility of the first unit is higher than its price. Now suppose that the marginal utility increases as he purchases more and more units of the commodity. In other words, the utility of an additional unit is higher than the utility of the preceding units. As the utility of the first unit is higher than the price, the utility of the second uni purchase the second unit The utility of the third unit would be higher than that of the second unit. Therefore, he will purchase the third unit as well. In this way, once he starts purchasing the commodity he would continue purchasing additional units of it till his entire income is spent on that commodity. The fact that a person does not spend his entire income on one commodity, proves that the marginal utility does not increase as the quantity of a commodity purchased by him increases. The conclusion then is that the marginal utility diminishes with every increase in the stock of the commodity. be still higher.