Today we will discuss the law of diminishing marginal utility commonly known as law of DMU. It is known as Gossen’s first law also. It explains consumer behaviour.
According to it as we go on consuming more and more units of a commodity, the utility obtained from every additional unit goes on decreasing. Law can be explained with the help of following example:
- The urge for having water is very high when we are thirsty may be after playing or doing any other activity, so marginal utility derived from first glass of water is maximum. Suppose we get 20 units of utility after having first glass of water.
- When we consume the second glass of water, the utility diminishes a bit say 15 units.
- After having third glass of water, the utility diminishes again say 10 units and after 4th we will get 5 units of utility.
- At 5th unit, we will be at the point of saturation. At this point, our marginal utility will be zero.
- At sixth unit, if we consume water, it will have negative effect. Our marginal utility will be negative this time, say -2. o a rational consumer does not consume beyond the point of saturation as consumption beyond this time will result in loss of total satisfaction. Next time, we will discuss the assumptions and exceptions of law of diminishing marginal utility commonly known as law of DMU.