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1.1 Marginal Utility analysis
This theory was formulated by Alfred Marshall
Utility is a measure of satisfaction derived from consumption of a commodity.
Basic Definitions
Total utility: It is the sum of the utility derived from a different unit of a commodity consumed by a consumer. In other words, Total utility = the sum total of all marginal utility.
Marginal utility: It is the additional utility derived from additional unit of a commodity. In short, Marginal utility = the addition made to the total utility by the addition of consumption of one more unit of a commodity.
1.1.1 Law of diminishing marginal utility
The additional benefit which a person derives from a given increase in stock of a thing diminishes with every increase in the stock that he already has.
For-example – If you are eating sweets; utility (or satisfaction) derived from each additional piece of sweet will decrease as you consume more and more of it.
1.1.2 Assumptions of marginal utility anlalysis
| 1. Cardinal Measurability of Utility | Utility is a measurable and quantifiable entity. Thus a person can measure the quantum of utility obtained. |
| 2. Constant Marginal Utility of Money | There is no change in marginal utility of money as you spend more of it. |
| 3. The Hypothesis of Independent Utility | The total utility which a person gets from the whole collection of goods purchased by him is simply the sum total of the separate utilities of the goods. |
1.1.3 Limitations of this law
The law of diminishing marginal utility is applicable only under certain assumptions.
- Homogenous units: The different units consumed should be identical in all respects. The habit, taste, treatment and income of the consumer also remain unchanged.
- Standard unit of Consumption: The different units consumed should consist of standard units. If a thirsty man is given water by successive spoonfuls, the utility of second spoonful may conceivably be greater than the utility of the first.
- Time Concept: There should be no time gap or interval between the consumption of one unit and another unit i.e. there should be continuous consumption.
- Law fails for prestigious goods: The law may not apply to articles like gold, cash where a greater quantity may increase the lust for it.