Tag: utility and law of diminishing marginal utility

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. 

Marginal utility refers to additional utility which a consumer gets on consuming one extra unit of a commodity. So, as consumer consumes more and more of a commodity, the satisfaction at each level will diminish. This is in accordance with the law of diminishing marginal utility.

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.