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MAHARASHTRA NATIONAL LAW UNIVERSITY,

AURANGABAD.

APPLICATON OF LAW OF DIMINISHING MARGINAL


UTILITY IN OUR DAY-TO -DAY LIFE

SUBMITTED BY: ARPIT GOYAL

ROLL NO. 10

B.A.LL.B (Hons.) III Semester

MAHRASHTRA NATIONAL LAW UNIVERSITY,

AURANGABAD

UNDER THE GIUDANCE OF

Mr. AKASH SHAHAPURE

ASSISTANT PROFESSOR (ECONOMICS)

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CONTENTS

1. INTRODUCTION
1.1 UTILITY
1.2 TOTAL UTILITY AND MARGINAL UTILITY
1.3 LAW OF DIMINSHING UTILTY
1.4 ASSUMPTIONS

2. EXCEPTIONS, ARE THEY REALLY EXCEPTION


2.1 IN CASE OF MISERS
2.2 USE OF LIQUOR AND WINE
2.3 COLLECTION OF RARE OBJECTS
2.4 MUSIC OR POETRY

3. THEORY VS APPLICATION

4. BASIS FOR PROGRESSIVE TAXATION

5. TAX AND SUBSIDY

6. VALUE DETERMINATION

7. WATER-DIAMOND PARADOX

8. OPTIMUM UTILISATION OF EXPENDITURE

9. HUE AND CRY FOR FRESHWATER

10. POLLUTION FREE AIR

11. CONSERVATION OF NON-RENEWABLE RESOURCES

12. CONSERVATION OF WILDLIFE

13. CONSERVATION OF CORAL REEFS

14. REFERENCES

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1 Introduction
Law of Diminishing Marginal Utility, which is said to be the base of many of the laws of
microeconomics, is an important concept to understand. It is derived from our day-to-day
decisions. In this project, we will discuss in details about what the Law of Diminishing Marginal
Utility is, Its assumptions, importance, exemptions, uses, application of the law, and also how it
has an effect in our day to day life.
To start with, we will discuss some important terms that will be used throughout the project.

1.1 Utility:
"Utility" is an economic term introduced by Daniel Bernoulli which means total satisfaction
received by a consumer from consuming a good or service. In the cardinal approach,it is
measured in ‘Utils’. Utils are the measurable units in which Utility of a commodity is measured.
Classical economists operate under the assumption that all utilities can be measured in terms of a
number. To support this quantitative measurement of satisfaction, the designation of a util was
formed.

1.2 Total Utility and Marginal Utility:


Total utility refers to the utility that a consumer derives from the consumption of the total units
of a commodity. It is the sum total of marginal utility, Whereas Marginal Utility refers to the
additional utility that a consumer derives from the consumption of an additional unit of a
commodity. In other words it is the change in the total utility because of change in total
consumption of the commodity.

1.3 Law of Diminishing Marginal Utility:


The Law of Diminishing Marginal Utility was explained by an economist, Alfred Marshall.
According to him, “During the course of consumption, as more and more units of a commodity
are used, every successive unit gives utility with a diminishing rate, provided other things
remaining the same; although, the total utility increases.”
In simpler words, Law of Diminishing Marginal Utility states that, when a consumer is
consuming multiple units of a commodity, the utility derived from each successive unit of the
commodity keeps on decreasing.

Assumptions in the Law of Diminishing Marginal Utility:


There are certain assumptions that are made for Law of Diminishing Marginal Utility. If any of
the assumptions is not true in the case, the law of diminishing marginal utility will not be true.
Following are the assumptions for the law of diminishing marginal utility:

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 Homogeneity - The goods should be homogeneous i.e. the quality and size of successive
units of goods should remain the same. If it varies, the law of diminishing marginal utility
may not be proven true.
 Continuity - Consumption of goods should be continuous. If there comes a break in the
consumption of goods, the actual concept of diminishing marginal utility will be altered.
 Constancy - Consumer’s taste and preference should not change. Also the fashion and trend
should remain same.
 Reasonability - Unit of good should not be very few or small. It should be of reasonable
size. Else, the utility may not be measured accurately.
 Rationality – The consumer must be a rational consumer

2 “Exceptions for the Law of Diminishing Marginal Utility”


Are these really Exceptions?
Law of Diminishing Marginal Utility is a law which has a very wide applicability. It is one of the
laws that can be applied in almost every case given that the above mentioned assumptions are
fulfilled. But there are certain things which are considered as the exceptions to the Law of
Diminishing Marginal Utility, here we’ll discuss which of those cases can be really accepted as
an exceptions and which the ones are where the law is still applicable.
 In case of misers.
In the case of a miser, it is pointed out that Law of Diminishing Marginal Utility does not
apply because as he gets more and more money, the Marginal Utility of money increases.
But, when the miser spends his money his utility of the commodity will be diminishing
perhaps more rapidly than in the case of others. Hence, a miser’s behavior cannot be a
significance exception to the law of diminishing marginal utility.

 Use of liquor or wine.


The law seems to be violated in case of alcoholics as marginal utility of the intoxicants
increases with every successive unit of liquor. This is true, but in this case the rationality
condition of the law is violated. The law deals with the behavior of the rational consumer
whereas the behavior of an alcoholic at that time is irrational or abnormal. Hence it is not a
genuine exception to the Law of Diminishing Marginal Utility.

 Collection of rare objects.


It is argued that this law does not apply for rare collections such as old coins, stamps and so
on because the longer and larger the number he collects, the greater will be the utility. But
as mentioned in law, here the consumer doesn’t collects homogenous goods. Every time he

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collects the stamps or coins of different kinds and hence it cannot be considered as an
exception to the Law of Diminishing Marginal Utility

 Music & poetry


In the case of music and poetry it’s noticed that hearing it or reading it over and over gives
better satisfaction, hence people argue that Law of Diminishing Marginal Utility is not
applicable here. But repeated hearing of that song will gradually result in its becoming
monotonous and its utility will go down, Hence Law of diminishing Marginal Utility is
applicable here and it cannot be considered as the genuine exception to the Law of
Diminishing Marginal Utility.

3 Theory VS Application
In subjects like social sciences, there’s often a wide gap between theories and their practical
application. This is because almost all theories of social sciences deals with human behavior with
certain assumptions. But human behavior is very uncertain. So assumptions are necessary to hold
the theory good. However, some of these assumptions are very unrealistic and do not work in all
situations. Hence many theories fail to work in a real life scenario. But when it comes to law of
diminishing marginal utility, it is completely different in this regard. Though this theory is also
based on human behavior, it has great practical applicability.Let us see how the law of
diminishing marginal utility is helpful in various fields of economics.

Basis for Progressive Taxation


The progressive taxation system is a system in which rate of tax increases with increase in the
level of income. The law of diminishing marginal utility is one of the fundamental principles in
public finance. This law serves as the basis for progressive taxation. Adam Smith explained
canons of taxation in his book ‘Wealth of Nations’. One of the canons of taxation is ‘Ability to
Pay’ in his book Wealth of nations which means that taxes should be imposed according to the
ability of people to pay. According to the Law of diminishing marginal utility, the marginal
utility of money keeps on decreasing as the income of a person increases. Hence the concept of
progressive tax is adopted by the government. As per the law of Diminishing Marginal Utility,

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the people with more income agree to pay more rate of tax because for them marginal utility of
money is lesser than it is for those with less income. This is one of the very important practical
applications of the law of diminishing marginal utility.

Tax and Subsidy


Through taxation and subsidies, Government takes away some of the resources from rich and
spends them to improve the welfare of poor. When a person possesses less money, the utility
derived from it is huge. At the same time, when a person possesses more money, the utility
derived from it is less because of the abundance. This can be considered as one of the practical
application of Law of Diminishing Marginal Utility.

Value Determination
The price of different goods that we come across in the market is also derived from the law of
diminishing marginal utility. We see that the commodities which are available in abundance has
lesser price when compared to those which are scarce. This is because when a commodity is
available in abundance, its marginal utility goes down and hence does the demand resulting in
decreased price. This change of price can even be seen in one commodity itself. For example, the
price of some food crops hikes at the time of their less production, maybe because of adverse
climatic conditions, and again comes down to normal when the production is adequate.

Water – Diamond Paradox

Though water is useful for our survival, Water is abundant and hence has no marginal utility.
Hence, water has no or little value-in-exchange. On the contrary, diamonds are just used for the

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showy purpose, but diamonds are scarce and hence possess a very high marginal utility.
Therefore, diamonds have high value-in-exchange.This scenario is often referred to as water-
diamond paradox. In this way, the law of diminishing marginal utility tells us why diamonds are
highly priced when compared to water.

Optimum Utilization of Expenditure

How much money an individual spends on a particular commodity is determined by the Law of
Diminishing Marginal Utility. When the marginal utility is equal to price, we call it as the
equilibrium point. At this point, we can say that the individual utilizes his or her expenditure
optimally. Though one does not calculate all these things in one’s day-to-day purchasing
activities, it still happens naturally and automatically. Nobody wants to pay a high price for a
commodity that does not give him utility. In this way, the law of diminishing marginal utility is
applicable in our day to day decisions.

Hue and cry for freshwater

In the recent times, there has been a lot of ruckus about need to conserve the freshwater.
Environmentalists have realized that there has been a lot of depletion of the freshwater resources
in the recent times.
The depletion of water resources is attributed to the following causes:
1.) High demand for water coupled with population explosion, the rapid industrialization
and technological development.
2.) Poor storage facility and careless attitude towards conservation of rainwater.
3.) Depleting ground water resources due to overgrazing and deforestation, causing soil
erosion and make the soil unable to permit water infiltration.
4.) Over-exploitation of ground water in order to meet the demand of increased population.
5.) Due to bad water management and ignorance, a lot of water is lost.
6.) The usability of the available water decreases with dumping of different pollutants in
water bodies.
7.) Siltation of bodies of water because of soil erosion which makes it unfit for drinking.

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This has resulted in very scarce availability of water. Groundwater is depleting fast in the world
and India is among the worst hit as per NASA’s gravity recovery and climate experiment
satellites. This scarcity of water has increased the marginal utility of the water and its
conservation has become one of the priority for most of the countries. Hence it can be seen that
the law of diminishing marginal utility being applied here.

Pollution free air

This is something which came into news very recently. In India, People were way too oblivious
of it about a decade ago. At that time fresh air was not something which was scarce. Industries,
vehicles, production units etc. were limited in number and hence there wasn’t as much air
pollution as it is now. Now because the number of vehicles, the industries etc. have increased
tremendously and hence air pollution has increased manifolds. The condition has reached to such
a point that serious measures are being taken in order to reduce the air pollution. People are
paying to purchase air purifiers to be installed in their homes; Government is adopting various
norms to check air pollution; various standards, like BS-IV, are being introduced to check the
vehicular emissions. A politician even rolled out schemes like the odd-even scheme just to
reduce the air pollution by any way. On a larger scale, there are various climate summits being
held, for example, the Paris Climate Summit was held with the main emphasis on reducing the
air pollution across the world. There has been international agreement known as KYOTO
PROTOCOL which also focuses on the reduction of carbon emissions of different countries.
Hence we can see as the fresh air is becoming scarce, people are becoming more conscious
regarding reducing the air pollution. This shows how Law of diminishing marginal utility can be
seen in almost every aspect of our lives.

Conservation of Non Renewable resources

There has been a huge shift in concern regarding the use of non-renewable resources.
Environmentalists are trying various methods to spread awareness among the people regarding
why we need to conserve our resources for the future generations. People are now adopting

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sustainable development, i.e. consuming the resources judiciously in such a manner so as to save
the resources for the future generations too. Government is promoting more and more use of
renewable resources of energy to protect the non-renewable resources. Many of the Dams, Hydel
Power Plants, Solar power plants, are being set up. Prices of fossil fuels are constantly increasing
because these are the non-renewable resources and are constantly being depleted. As their
quantity is being reduced, their utility is increasing and hence consumers are ready to pay more
price. This can also be seen as a practical aspect of Law of Diminishing Marginal Utility in day
to day life.

Conservation of Wildlife

Nowadays, conservation of wildlife has become one of the main focus of many nations. Every
nation wants to preserve its flora and fauna. Due to the factors like excessive hunting, Poaching,
Natural Calamities etc. many of the animals have become extinct. Also there are many animals
which are endangered and are on the verge of getting extinct. There are animals like Rhinoceros,
Giant Panda, Orangutan, Polar Bear, Tiger, Ganga River Dolphin, Asiatic Lion, Snow Leopard,
Indian Bison etc. which are endangered. This poses a serious threat over the rich heritage and the
flora and fauna of the nation. Hence government adopts various measures to save the flora and
fauna of the country. In India, there are many such measures, below are few of them mentioned.

1.) Wildlife Protection Act, 1972 was established in whichthe Union Government has
established a protected area network country-wide for protection of endangered species
and the habitats of threatened flora and fauna. Also, Legal Protection has been provided
to wild animals against hunting and commercial exploitation.
2.) Special programs have been launched like ‘Project Elephant’ and ‘Project Tiger’ for
conservation of the endangered species and their habitats. There are about 50 Tiger
Reserves in India for the protection of the Tigers.
3.) National Biological Diversity Act (NBA), 2002 has been enacted to ensure protection of
threatened species and their habitats.
4.) Botanical Survey of India (BSI) has brought a number of threatened plants to cultivate
them in its associated botanical gardens.

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Hence it can be seen how the plants and animals that are on the verge of getting extinct, have
become too important. So many efforts are being made in order to protect them, to preserve
them, to increase their number. This clearly points out the Law of Diminishing Marginal Utility.

Protection of Coral Reefs

Among the recent decades, there has been a significant emphasis by the environmentalists
around the world regarding saving of the coral reefs. Coral Reefs are animals which build
skeletons of calcium carbonate and have symbiotic algae that live inside them. They are one of
the oldest and most complex Ecosystem of the Planet. The process of formation of coral reefs is
very slow. Once they are damaged, it may take decades, centuries, or even millennia to recover
completely. These are being depleted due to climate changes, increased ocean temperature,
reduced pH level of the water in the oceans etc. Hence scientists and environmentalists are
working hard to spread awareness among the people. As the quantity of the corals are being
depleted continuously, Scientists are giving it a high importance to save it and protect it. This
shows that as quantity is decreasing, its utility is being increased. Hence Law of Diminishing
Marginal Utility is practically being applied here.

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CONCLUSION
To Conclude, It can be said that Law of Diminishing Marginal Utility is a Law with a great
applicability. From very basic day to day life choices like buying stuff, eating sandwiches,
drinking water; to national and international issues like conservation of coral reefs, reduction of
Air and water pollution, Law of Diminishing Marginal Utility can be found operating in each and
every situation. When the given assumptions or the conditions of the law are fulfilled, the Law
can be said to be universally applicable to almost each and every situation. In this project various
concepts like: the law of diminishing marginal utility, its assumptions, how the exemption to the
law of diminishing marginal utility aren’t competent enough to defy the law, how the law is
applicable in economic, national as well as international issues like air and water pollution,
Taxation, protection of wildlife, conservation of corals etc. ; have been discussed. It also explains
how utility is different from usability with an example of Water – diamond paradox. Law of
Diminishing Marginal Utility is important because it is the basis of many other laws in
economics. Many laws like law of demand are derived on the basis of law of Diminishing
Marginal Utility. In this way this project covers the different Applications of Law of
Diminishing Marginal Utility in real life.

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References
Ahuja, H.L., Introduction to Microeconomics.

economics4bastudents.com. (n.d.).

Manjunatha, B. (n.d.). Google Books. Retrieved from books.google.com.

OwlCation. (n.d.). Retrieved from owlcation.com.

YourarticleLibrary.com. (n.d.).

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