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Economic Theory

2. All the units of the commodity must be identical in all aspects like
taste, quality, color and size.
3. The law holds good only when the process of consumption
continues without any time gap.

4. The consumer’s taste, habit or preference must remain the same
during the process of consumption.

5. The income of the consumer remains constant.
6. The prices of the commodity consumed and its substitutes are
constant.
7. The consumer is assumed to be a rational economic man. As a

rational consumer, he wants to maximize the total utility.
8. Utility is measurable.

Example. The table below contains information about the total utility
Jerry gains from coffee he buys from the Corner Shop. Does this example
exhibit the Law of diminishing marginal utility? Explain.

Cups of coffee 1 2 3 4 5
Total Utility, $ 1.50 2.70 3.60 3.60 2.00

The easiest way to see this is to calculate the marginal utility of each
cup, or how much each cup adds to the total utility.

Cups of coffee 1 2 3 4 5
Total Utility, $ 1.50 2.70 3.60 3.60 2.00
Marginal Utility, $ 1.50 1.20 0.90 0 -1.60

The numbers in the bottom row are steadily decreasing, which means
each successive cup is worth less that the previous one. This is an

indication of diminishing marginal utility.

3. Law of Equi-Marginal Utility
The idea of equi-marginal principle was first mentioned by
H. H. Gossen (1810–1858) of Germany. Hence it is called Gossen’s

second Law. Alfred Marshall made significant refinements of this law in
his ‘Principles of Economics’.
The law of equi-marginal utility explains the behavior of a consumer
when he consumes more than one commodity. Wants are unlimited but the

income which is available to the consumers to satisfy all his wants is
limited. This law explains how the consumer spends his limited income on

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