Exceptions to the law of diinishng marginal utility

The law is based on unrealistic assumptions or conditions. In reality it is very difficult to meet the conditions of homogeneity, continuity and rationality etc simultaneously.

Sometimes, it appears that the law is experienced but on closer analysis it is seen that the exceptions are only apparent and not real. Eg. Money, rare collections, music etc go against the basic assumptions of the law and hence are not genuine exceptions.

1]Utility is relative – Utility depends not only on the stock of the commodity that a person has but also on the stock of the commodity others have. This has been ignored by Marshall.

2] Utility of different goods is not independent – Utility of different goods is interdependent. The satisfaction derived from the consumption of one commodity is influenced directly or indirectly by the utility of other goods. eg complements and substitutes.

3] A single commodity model unrealistic – Marshalls analysis of a single commodity model is unrealistic because the utility variations in different combinations of goods have not been considered.

4] Measurability of utility is difficult – as it is a subjective and introspective ( psychological ) ie changes from person to person. It can be measuredonly in terms of intensity of the want. Therefore it is difficult to convert into cardinal numbers.

5] Utility is not quantifiable – Utility is subjective and depends on the intensity of the want. It is a feeling experienced and being subjective cannot beaded or subtracted ie cannot be quantified.

6] Violates the condition of constancy – It has been observed that the  the income, tastes, habits, preferences, character, attitude etc change. This violates the condition of constancy thus making the law invalid.

7] Violates the condition of homogeneity – In reality consumption is not of homogeneous units but of dissimilar units. Ie goods are different in size shape flavor, colou etc. Therefore the law cannot be applied.

8] Violates the condition of divisibility – The law cannot be applied to the consumption of bulky and indivisible goods like T V sets, a house, fridge, etc as no one buys more than one unit of these commodities at a time.

9] Violates the condition of continuity or quick succession – Bulky and indivisible goods are consumed one at a time and not in quick succession eg computer, washing machine etc.

10] It goes against the condition of reasonability – In case of consumption of inadequate units this law is not applicable.

11] Marginal utility of money is not constant in reality. This is because the marginal utility of money does diminish as its stock increases, and rises as its stock falls.

12] Prices of commodities may not remain constant – The price of the commodity and of other commodities ( complements and substitutes )will change, leading to a change in in utility derived and hence the law may not be applicable.

13] Violates the condition of rationality – Consumption which results in a psychological or physical change in the consumer eg consumption of alcohol, drugs etc restricts the application of this law, as it goes against the condition of rationality.

14] Acquisition of goods to satisfy a hobby – eg collection of stamps, coins etc will limit the application of the law as more the person acquires, more will be his utility.( ie the more he has, the more he would like to have )    Also no two units are similar so this violates the condition of homogeneity.

15] Music, poetry reading etc are also an exception to the law because increase in its stock will increase utility. This also brings about a change in the persons taste and character threrfore violates the condition of consistency.

16] Money – It is assumed that marginal utility of money does not diminish as one is never satisfied even after getting more of it. Also marginal utility of money can never be zero or negative as it represents purchasing capacity. It is the goods purchased with money that have diminishing marginal utility.

17] Money acquired by misers will lead to increase in utility.

Also misers behavior is not rational. He hoards money and does not use it as a medium of exchange. Therefore the law cannot be applied.

18] Comparison of marginal utility – Marginal utility cannot be quantified and therefore adding and subtracting of utility is not possible. It is also not possible for the consumer to compare utilities derived from commodities consumed.

19] The law is applicable to rational consumers only. It is not applicable to irrational consumers.

Despite these drawbacks the law has some validity. Though utility cannot be measured cardinally, it can be compared  ordinally. Therefore cannot be discarded outright.

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Posted in General Economics