Page 36 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-3: Consumer Theory–Cardinal Utility Analysis

between the total amount of consumers would be willing to pay to consume the quantity of goods Notes
transacted on the market and the amount actually have to pay for those goods. This difference is
called Consumer Surplus. The concept of Consumer Surplus is based on the difference between
Total Utility and Marginal Utility.

3.5 Law of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility is the foundation stone of utility analysis. We experience this
in our day to day life. If you are set to buy pen at any given time, then the number of pens with you
goes on increasing while the marginal utility from each successive pen will go on decreasing. It is the
reality of man’s life which is referred in economics as law of diminishing marginal utility states that
other things being equal, the marginal utility of goods diminishes as more of it is consumed in a
given time period.

In the 19th century, few economists like Benthem, Gossen, Menger, and Walrus attributed this law.
According to Jevons this law is based on Weber-Fechner’s Psychological law. His Psychological law
states that with increase in the quantity of the commodity the significance of the additional unit goes
on diminishing. Prof. Boulding called it, “Law of Eventually diminishing marginal utility”. It is also
known as Gossen’s First law.
1. According to Marshall, “The additional benefit which a person derives from a given stock of a thing
diminishes with every increase in the stock that he already has.”
2. According to Samuelson, “The law of diminishing marginal utility states that ceteris paribus as the
amount of goods consumed increases, the marginal utility of that goods diminishes.”
It is clear from the above definition that at given time when we continue to consume additional units
of a commodity, the marginal utility from each successive unit of that commodity, other things being
equal, go on diminishing in relation to the proceeding unit. It is this diminishing tendency of the
marginal utility, which has been sainted in law of diminishing marginal utility.

Total utility never reach the point of saturation.

3.6 Basic Assumptions

The three main assumptions of this law are the following:
1. Every unit of the commodity being used in the same quality and size, for example, a cup of tea or a
glass of water.
2. There is a continuous consumption of the commodity.
3. Marginal utility of the every commodity is independent.

LOVELY PROFESSIONAL UNIVERSITY 29