On what grounds is the law of diminishing marginal utility : The law of diminishing marginal utility states that as a person consumes more units of a good or service, the additional satisfaction or utility gained from each successive unit decreases.
While this law has been a fundamental concept in classical and neoclassical economics, modern economists have raised several criticisms and limitations of the law of diminishing marginal utility.
Some of these criticisms include:
- Violation of Real-world Behavior: Critics argue that real-world consumer behavior often doesn’t conform precisely to the strict assumptions of the law. People may continue to derive increasing marginal utility from certain goods, especially if they are novel, exciting, or highly desired.
- Non-Tangible Goods and Experiences: The law of diminishing marginal utility is more applicable to tangible goods. Modern economies place increasing importance on non-tangible goods like information, experiences, and digital content, where the concept of marginal utility may not hold as strongly.
- Time Considerations: The law assumes a static and immediate consumption scenario. However, people often consider the timing of consumption. For instance, the utility of consuming food when hungry might not necessarily diminish.
- Habit Formation and Context: Consumption patterns are influenced by habits and context. People might consume more of a good in a particular context or setting even if the marginal utility is decreasing.
- Interactions and Network Effects: In some cases, the utility of a good may increase as more people use it, creating network effects. For instance, social media platforms become more valuable as more people join, leading to non-diminishing utility.
- Necessities vs. Luxuries: The law might hold better for luxuries or non-essential goods rather than necessities. People’s consumption behavior for essential goods like food, water, and shelter might not strictly adhere to diminishing marginal utility.
- Intertemporal Preferences: People often make decisions considering the intertemporal preferences, meaning they trade off present and future consumption. This can complicate the application of the law.
- Psychological Factors: People’s utility and satisfaction are influenced by psychological factors such as expectations, aspirations, and social comparisons, which may not align with the strict application of diminishing marginal utility.
Modern economists criticize the law of diminishing marginal utility due to its assumptions that may not fully capture the complexities of real-world consumer behavior, particularly in the context of changing technology, preferences, and the dynamics of non-tangible goods and experiences. While the law remains a useful concept, its strict application may not always accurately reflect individuals’ decisions and preferences.