UNIT – II

DEMAND AND UTILITY ANALYSIS

Demand - Definition, Meaning, Nature and types of demand, Demand function, Law of demand - Assumptions and
limitations. Exceptional demand curve.
Elasticity of Demand - Definition, Measurement of elasticity, Types of Elasticity (Price, Income, Cross and
Advertisement), Practical importance of Price elasticity of demand, Role of income elasticity in business
decisions, Factors governing Price Elasticity of demand.
Utility Analysis: Utility- Meaning, Types of Economic Utilities, Cardinal and Ordinal Utility, Total Utility, Marginal
Utility, The law of Diminishing Marginal Utility and its Limitations.

UNIT –II:
INTRODUCTION

DEMAND AND UTILITY ANALYSIS

Demand Elasticity of Demand Utility Analysis

Meaning and Definition of Demand Definition, Measurement of Elasticity Meaning, Types of E.U
Nature and Types of Demand Types of Elasticity Cardinal and Ordinal Utility
Demand Function Practical Importance of PED TU & MU
Law of Demand - Assumptions and Role of Income Elasticity in BD LDMU and Limitations
its Limitations
Exceptions of Demand Curve Factors Governing PED
 Demand

1.0 Meaning of Demand

 In ordinary language demand means desire of a person for a particular commodity or service.
But in Economics demand is something more than the desire to purchase, though desire is one
of the elements of it.
 Demand refers to the quantity of a commodity that a buyer is willing to buy at given
price per unit of time.
 Thus the definition of demand includes three components
1. Price of the commodity
2. Quantity of the commodity to be bought
3. The time period
 Desire becomes demand only when it is backed up by:
a) Ability to buy (Means to Purchase)
b) Willingness to pay the price (Willingness to use those means for that purchase)
 The concept 'Demand' refers to the quantity of a good or service that consumers
are willingand able to purchase at various prices during a given period of time.
Example:
1. Varsha purchased 1 kg of rice at Rs.25 per kg last week. This
is the demandfor rice by Varsha.

2. Varsha purchased 2 kg of mangoes at Rs. 50 per kg last week. This is the

demandfor mangoes by Varsha. and so on

1. 2 Types of Demand

There are three types of demand. They are

1. Price Demand
2. Income Demand
3. Cross Demand
1. Price Demand
Price demand expressed the relationship between price and quantity demanded
ofcommodity. Therefore price demand may be expressed in the form of a small function
Dx =f(Px)
Where Dx = Demand for X commodity
Px = Price of X commodity
f = functional relationship
2. Income Demand
It explains relationship between income of the consumer and demand.
Thereforeincome demand may be expressed in the form of a small function
 Dx =f(Y)
Where Dx = Demand for X commodity
Y = Income of Consumer
f = functional relationship
3. Cross Demand
Cross Demand explains relationship between changes in demand for a
commodity dueto change in price of related commodities, other things reaming
constant. Related goods may be either substitutes or complimentaries.
Therefore Cross demand may be expressed in theform of a small function
Dx =f(Py)
Where Dx = Demand for X commodity
Py = Price of Y commodity
f = functional relationship

1.3 Demand Function

Demand function expressed in mathematical expression showing the
relationship between the quantity demanded of commodity and the factors that determine
it. It is expressed as follows
Dx =f(Px P1 --------Pn,Y,T)
Where
Dx = Demand for Good X

Px = Price of Good X

P1 --------Pn= Prices of Substitutes or Complimentary

Y= Income of Consumer

T=Tastes of the Consumer

f = functional relationship that determines the Quantity

demanded

Here, Demand is a Dependent Variable, whereas Prices, Income, Tastes of Consumers are
Independent Variables

1. 4 Determinants of Demand

There are a number of factors that determine the demand for good. A Demand function
shows the factors that determine the demand for a good. The following are some of the important
factors that determine demand
 1. Price of the Commodity
2. Income of the Consumer
3. Prices of Related Goods (Substitutes or
Complimentary)
4. Tastes and Preferences of the Buyer
5. Population
6. Technological changes
7. Change in weather
8. State of Business

1. Price of the Commodity

Generally we are willing to buy more quantity of a commodity at a lower price
andless of it at a higher price, if all other factors determining demand remain constant. The
demand for a commodity is inversely related to its price
2. Income of the Consumer
The demand for a commodity also depends on the income of the buyer. When your
income increases, you are likely to spend more on purchase of some goods such as fruits,
full cream milk, butter etc. Such goods are normal goods. Normal goods are those goods
whose demand increases with the increase in income. So, the demand for normal goods is
directly related to the income of the buyer.

But there are some goods whose demand decreases when income of the buyer
increases,such as jowar, bajra, toned milk etc. These goods are called inferior goods, so,
the demand for inferior goods is inversely related to the income of the buyer.
3. Price of Related Goods
The demand for a commodity is also influenced by the prices of its related goods.
Related goods can be of two types: (a) substitute goods (b) complementary goods
(a) Substitute Goods
Substitute goods are those goods which can easily be used in place of each other.
Examples of substitute goods are coke and pepsi, tea and coffee etc. If price of coffee
increases, people will demand more of tea and thus demand for tea will increase. If price of
coffee falls, people will demand more of coffee and thus demand for tea will fall. So, the
demand for a commodity is directly related to the price of its substitute goods.
 (b) Complementary Goods
Complementary goods are those goods which are used together in satisfying a
particular want. Examples of complementary goods are car and petrol, ball pen and refill
etc. If we have a car, we also require petrol to run it. Demand for car will decrease. If the
price of one of them increases the demand for other good will decrease and if price of one
of them falls, the demand for the other will increase. So, the demand for a commodity is
inversely related to the price of its complementary goods.
4. Tastes, Preferences and Fashion
Tastes, preference and fashion are important factors which affect the demand for a
commodity. For example, if Monika prefers jeans and tops in comparison to salvar and
kameej, her demand for jeans and tops will increase. So demand for those goods increases
which are preferred by the buyer or which are in fashion.

5. Population

Size of population of a country is another important determinant of demand. In

other words, a change in the size of population will affect the demand for certain goods.
For instance, larger the population, more will be the demand for certain goods like food
grains, clothes etc.

6. Technological changes

Due to technical progress, new discoveries enter the market. As a result, old goods
are substituted by new goods. For instance, the demand for 'Cell Phones' reduced the
demand for land line' phones.

7. Change in weather

Demand for a commodity may change due to a change in climatic conditions. For
instance, during summer demand for cool drinks, cotton clothes and air-conditioners
increases. During winter demand for woolen clothes increases.

8. State of Business

During the period of prosperity demand for commodities will expand and during
depression demand will contract.
1. 5 Demand Schedule

Demand Schedule can be constructed to any commodity when the list of prices and
the quantities purchased at those prices are known. Demand schedule is generally
 expressedin two ways. They are
1. Individual Demand Schedule
2. Market Demand Schedule

Individual Demand Schedule:

Every individual demands some goods and services for the satisfaction of
his/her wants. Individual demand is the quantity of a commodity that an individual
buyer is willing to buy at the given price at given time.
Individual Demand Curve:

Demand for Mangoes

Price of Mangoes(Rs per Kg) Quantity Demanded ofMangoes
Per Week (in Kg)
80 0.5

70 1.0

60 1.5

50 2.0

40 2.5

30 3.0

A above table tells how a consumer in the market purchases different quantities of a
commodity demanded at different prices. When the price of mango is Rs.80, he is
buying only 0.5 kg and demands 3.0 kgs as the price falls to Rs. 30. Thus it is clear that
price and quantity demand have an inverse relationship.
 The relationship of price and quantity demanded is represented diagrammatically,
it is called demand curve. The demand curve shows different quantities of a commodity
demandedat different prices in diagrammatic form.
In the diagram take quantity demanded of mangoes on X-axis and price of mangoes
on Y- axis. On the Y-axis (vertical) the prices starting from Rs 30 to 80 are plotted. On the
X-axis (horizontal) the quantities of mangoes starting from 0.5 to 3 kg are plotted. With the
help of the above individual demand schedule, how a consumer varies his purchases at
different prices are shown by points A,B,C,D,E and F. the demand curve is obtained by
joining all the points
Market Demand Schedule:

In a market, there are a number of consumers, each purchasing different quantities

of the commodity at the corresponding prices. Market demand is the total quantity of a
commodity that all the individual buyers in the market are willing to buy at given price at
given time.
Let there are only three buyers buying mangoes in the market – A, B and C, market
demand will be the sum of individual demand schedules of these three buyers.

Market demand for Mangoes

Price of Mangoes Quantity Demanded of Market Demand of
(Rs per Kg) mangoes per week mangoes per week
(in kg) (in kg)
(A+B+C)
A B C
80 0.5 1.0 0 1.5
70 1.0 1.5 0.5 3.0
60 1.5 2.0 1.0 4.5
50 2.0 2.5 1.5 6.0
40 2.5 3.0 2.0 7.5
30 3.0 3.5 2.5 9.0

When price of mangoes is Rs. 80 per Kg, A demands 0.5 Kg of mangoes, B

demands 1.0 kg of mangoes and C demands no mangoes. Thus market demand for
mangoes at a price of Rs 80 per kg. is 0.5 + 1.0 + 0 = 1.5 kg of mangoes per week.
Likewise, market demand for mangoes can be obtained at other prices also as shown in the
table
Demand Market Demand Curve:
To draw the market demand curve with the help of the above market demand schedule
 In the above figure it is obvious that by adding up the individual demand curves of
demand AD,BD and CD, we can derive the market demand curve i.e., MD, which has
negative slope like individual demand curve

1. 6 Law of Demand

Alfred Marshall' stated the law of demand as "other things being constant, if price of a
commodity increases it's demand decreases and if price decreases it's demand increases.” The
law of demand explains the relationship between the price and quantity demanded of a
commodity. There is an inverse or negative relationship between the price and quantity
demanded
1. 6.1Assumptions of the law of Demand

1. Consumer's tastes and preferences remain constant. i. e. There is no change in it.

2. Income remains constant.

3. Prices of substitutes and complementaries remain constant.

4. No substitute is available to the commodity

5. Population remains constant.

6. No expectations of future price changes

1. 6. 2 Limitations of the law of Demand

All above assumptions are the limitations to the Law of demand. They are as follow

1. Change in Income: If there is change is consumer's income. Law of demand does't

operates.
 2. Change in Tastes and Preferences : If the tastes and preferences of people may go
on change, the law of demand could not be found true.

3. Change in prices of other goods : If prices of other goods i. e. substitutes and

complementaries are changed, the law of demand doesn't show the inverse
relationship between price and demand for a commodity.

4. Population Change: If Population changes the law of demand does not found true.

5. Availability of Close Substitutes: If there is existence of close substitutes to

consumer's goods, the law of demand doesn't fulfil the inverse relationship between
price and demand.

1. 7 Exceptions to the Law of Demand

There are few exceptions to the law of demand. In some particular situations it will
not be existed. Hence these situations are called exceptions. They are
1. 7.1 Geffen’s Paradox :
Sir Robert Giffen (1637-1910) observed that poor people will demand more of inferior goods,
if their prices raise. He observed that when the price of bread increased, workers in England
purchased more of the bread, by reducing the consumption of meat whose price is constant. Geffen
noticed that people spent a higher portion of their income on bread, substituting bread for meat.
Goods of this type are known as Geffen goods. For example, Ragee, Jowar, Bajra, broken rice
ete. As the consumers consider these goods inferior they will buy more of them when the prices raise
and less when the prices fall.
1. 7. 2 VEBLEN EFFECT (Prestigious Goods):
Theorstein Veblen (1857-1929) is most famous for his book "The Theory of the
Leisure Class"
Veblen pointed that there are some goods like Diamonds, Precious Stones, Costly Furniture
etc. which are demanded by very rich people for their social prestige. If the prices of these
goods fall poor people also can buy. Hence rich people stop buying these goods after a fall in
their price as these goods do not have any special status hence, there is a positive relationship
between price and quantity demanded which is contrary to the law of demand.
1. 7. 3 SPECULATIVE EFFECT:
If the price of a commodity increases, then the consumer will buy more of it, if it is to
increase still further. Thus an increase in price may not be accompanied by a decrease in its demand
which is contrary to the law of demand. For instance it takes place in the market for stocks and shares.
1. 7. 4 ILLUSION:
Sometimes, consumers develop a false idea that high priced good wills have a better
quality instead of a low priced good. If the price of such a good falls, they feel that it's quality
also deteriorates and they do not buy, which is contrary to the law of demand.
It is to be noted, that in case of inferior goods, prestigious goods, expectations about
future price changes and illusion of high price goods possessing high quality, the law o
demand will not apply.
 Elasticity of Demand

2.0 Definition of Elasticity of Demand

Elasticity of demand means the degree of sensitiveness or responsiveness of demand
to a change in price. Elasticity of demand changes from person to person, place to place,
time to time and commodity to commodity. For instance, rice, salt, vegetables, etc. do not
show significant changes in the quantity demanded even after a rise in the price of these
goods. Similarly, there will be a grater change in the quantity demanded of refrigerators,
T.Vs, Air coolers, washing Machines etc. With a small fall in their prices

2.1 Types of Elasticity of Demand

There are three types of elasticity of demand.

1. Price elasticity of demand (EP)

2. Income elasticity of demand (EY)
3. Cross elasticity of demand (EC)
2.1.1Price elasticity of demand (EP):
"Marshall" was the first economist, to define the price elasticity of demand as the ratio of
percentage change in quantity demanded in response to a percentage change in price. Mathematically
it is shown as :

Ep =

= x

= x = x

Where q = Original Quantity Demanded

P =

=
=
2.1.1.1 Types of Price elasticity of demand (EP):
There are five types of elasticity of demand. They are

1. Perfectly elastic or infinite elasticity demand (Ed = ∞)

2. Perfectly Inelastic demand or Zero Elastic Demand (Ed = 0)
3. Relatively Elastic demand (Ed > 1)
 4. Relatively Inelastic demand (Ed <1)
5. Unit Elastic demand (Ed = 1)

2.1.1.1.1 Perfectly elastic or infinite elasticity demand (Ed = ∞)

When a small change in price leads to very large amount of change in demand, it is called as
perfectly or infinitely elastic demand. Is is diagrammatically represented as follow.

Here, demand curve is a horizontal straight line to X axis. The numerical value of
Perfectly elastic demand is Infinite (Ed = ∞)
2.1.1.1. 2 Perfectly Inelastic Demand or Zero Elastic Demand (Ed = 0):
Change in price does not have any influence on the quantity demanded. The demand
is non responsive to change in price.

DD is demand curve. It is vertical straight line curve parallel to Y axis. It shows there
is no change in quantity demanded as price changes. Price changes from OP to OP1, but
demand remains OD i. e. same
2.1.1.1. 3 Relatively Elastic demand (Ed > 1)

When change in price is followed by big change in demand, it is called elastic

demand. In other words, when the change in quantity demanded is greater that change in
price is called relatively elastic demand. In this case elasticity of demand is greater, than 1. (e
>1). It is diagrammatically shown as follow

In the figure, change in price PP1 is smaller than the change in demand QQ1 .
Therefore, DD demand curve is flatter.
2.1.1.1. 4 Relatively Inelastic Demand (Ed <1)

When change in demand is smaller than change in price, it is referred as relatively inelastic
demand i. e. Large change in price leads to smaller change in quantity demanded. Diagrammatically it
is shown as follow.

DD is downward slopping demand curve. It shows that change in price PP1 is greater than
change in quantity demanded QQ1. Hence, the demand is inelastic.
2.1.1.1. 5 Unit Elastic demand (Ed = 1)

When the change in price is exactly equal to the change in demand, it is referred as unitary
elastic demand. Here, demand changes in equal proportion of change in price. Therefore elasticity of
demand is equal to 1. It is diagrammatically shown as below.
 DD is downward slopping demand curve. It shows that change in price PP1 is greater equal to
the change in quantity demanded QQ1. Therefore price elasticity of demand is equal to 1, or it is
called the unitary elastic demand.
2. 2 Methods of Measurement of Price Elasticity of Demand:
There are three methods of measurement of Elasticity of Demand, viz,
1) Total Outlay or Expenditure Method
2) Point or Geometrical Method
3) Arc Method
2. 2.1 Total Outlay Method
This method was introduced by Alfred Marshall. Price elasticity of demand can be measured
on the basis of change in the total outlay due to a change in the price of a commodity. This method
helps us to compare the total expenditure from the point of view of a buyer or total revenue from the
point of view of the seller before and after the change in price. We can get total outlay by multiplying
the quantity demanded with price of the commodity.
P = Price
Q = Quantity Demanded
P x Q = Total outlay (Total Revenue)
Total outlay = Price x Quantity Demanded
Total Outlay Method explains three types of price elasticity’s of demand. They are
Elastic Demand, unitary elastic and Inelastic Demand. This method is explained with the
help of following table
2. 2. 2 Geometrical or Point Method:
The Point Method of price elasticity of demand was introduced by Marshall.
Generally this method of measurement of elasticity is used for small changes in price. In this
method the elasticity of demand is measured at any point on demand curve. When the
demand curve is a straight line demand curve. In order to measure elasticity of demand at any
point on a demand curve, the formula used is as below. Elasticity of demand at any point on
demand curve is the ratio of lower part of the demand curve to the upper part of the demand
curve, from that point, where elasticity of demand is to be measured.

Price Elasticity of demand =

DD1 is a straight line demand curve. It's length is 4". A, B, C are points lying on that
curve. B is a mid point. Which divides DD curve equally into two parts. So BD = BD1 = 2. A
point lies at the mid point of segment BD. Therefore BA = AD = 1. Similarly C Point lies at
the midpoint of segment BD. so BC = CD1 = 1.
Demand at point A = = =3

Hence elasticity of demand at point A is greater than 1.

Elasticity of demand of point B = = =1

Therefore elasticity of demand at point B is equal to 1.

Elasticity of demand of point C = = =0.999

The elasticity of demand at point C is less than 1.

Elasticity of demand of point D1 = = =0

The elasticity of demand at point D = = =∞

Elasticity of demand at point D = ∞

In this way the elasticity of demand at the point curve is measured
2. 2. 3 ARC Method:
The ARC Method is considered as there are some problems in using the point
method. The point method is considers small changes in prices. In fact, it is too difficult to
get information about very small changes in price and quantity demanded.
It is to be noted that, there will be gaps in the demand schedules. In such cases, it is
not possible to apply Point Method to measure the Elasticity of Demand. In order to avoid
the problems in point method, economists have devised a new method known as "Arc
Method'.
The word "Arc' means a portion or a segment of a demand curve. In this method mid -
points between the old and new price and quantities demanded are used. This method studies
a segment of the demand curve between two points. Hence 'Arc Method' is also known as
Average Elasticity of demand.

The above diagram shows that the 'ARC' exists between the points AB on the demand
curve DD. The formula given below is used to measure price elasticity.
Arc elasticity between points

AB = ÷

= x

2. 4 Practical Importance of Price Elasticity of Demand

 2. 2 Income Elasticity of Demand (EY):

2. 4 Role of Income Elasticity in Business Decisions

decisions

2. 3 Cross elasticity of demand (EC):

2. 6 Factors Governing Price Elasticity of Demand

Following factors may affect the price elasticity of demand for a good:
1. Availability of close substitutes:
Demand for a commodity which has large number of substitutes, is usually
more elastic than those commodities which have no substitutes. For example, coke,
Pepsi, limca etc. are good substitutes. Even a small rise in price of coke will induce
the buyers to go for its substitutes. On the other hand demand for electricity will be
less elastic because it has no close substitutes.
2. Nature of the Commodity:

Demand for necessities like medicines, food grains is less elastic because we
have to consume them in minimum required quantity, whatever their price may be.
But demand for comforts and luxuries like refrigerators, air conditioners etc. is more
elastic because their consumption may be postponed for future if their price rises.

3. Share in Total Expenditure:

Greater the proportion of income spent on the commodity, more is the

elasticity of demand for it. Demand for a commodity is inelastic if proportion of
income spent on that commodity is very small.

4. Level of Price:

Demand for a commodity at higher level of price (like air conditioners, cars
etc.) is generally more elastic than for a commodity at lower level of price (like match
box, pencils etc.)

5. Level of Income:

Demand for a commodity is generally less elastic for higher income level
groups in comparison to people with low incomes. For example, if price of a good rises,
a rich consumer is not likely to reduce his demand but a poor consumer can reduce his
demand for that commodity.

6. Habits:

Habits of consumers also determine price elasticity of demand of commodities. For

example, a chain smoker will not restrict his smoking even when the prices of cigarettes rise.
 Utility Analysis
3.0 Utility Meaning

 Consumer’s equilibrium refers to a situation where the consumer has achieved

maximum possible satisfaction from the quantity of the commodities purchased given
his/her income and prices of the commodities in the market. The resources are scarce
in relation to unlimited wants; a consumer has to follow some principles or laws in
order to attain the highest level of satisfaction.
 Utility is defined as the power of a commodity to satisfy a human want.
 Utility of a commodity is the total amount of psychological satisfaction that a person
gets from consumption of a good or service.
Example: A thirsty person derives satisfaction from drinking a glass of water. So a
glass of water has got utility for the thirsty person.
 Utility differs from person to person.
 Utility is subjective and cannot be measured quantitatively
 The sake of convenience it is measured in ‘Utils’
 Marshall suggested that the measurement of utility should also be done in monetary
terms by converting ‘Util’ into money by using the following formula
Utility in Money = Utility in Util/Utility of a rupee.
 Utility of rupee can be assumed to be any number such as 1, 2, 3 ... . Let utility of a
rupee is assumed to be 2 utils.
Then 10 utils = = 5.

3.1 Types of Economic Utilities

There are two main approaches to study consumer’s equilibrium. They are as follows:
1. Cardinal utility approach (or Marshall’s utility analysis)
2. Ordinal utility approach (or indifference curve analysis)

3.1.1 Cardinal Utility Approach (or Marshall’s Utility Analysis)

Utility is cardinal in the sense that utilities is measureable and quantifiable entity. The
numbers 1, 2, 3,4 etc. are cardinal numbers. According to the concept of cardinal utility, the
utilities derived from the consumption of commodities can expressed in terms of numbers
such as 1, 2, 3,4 and so on.
 For example: A person can say that he derives utility equal to 10 Utils from the
consumption of 1 unit of commodity A and 5 utils from the consumption of 1 unit of
commodity B. since he express which commodity gives him better utility or satisfaction
3.1. 2 Ordinal Utility Approach (or Indifference Curve Analysis)

Prof. J.R. Hicks criticized the utility approach as unrealistic because satisfaction
(utility) is a subjective phenomenon and so it can never be measured precisely. He, therefore,
presented an alternative technique known as indifference curve approach (also called ordinal
utility approach). It is based on the assumption that every consumer has a scale of preference
in the form of assigning ranks (like 1st 2nd, 3rd rank) to different combinations of two goods
called bundle and can tell which bundle he likes most.

3. 2 Total Utility

Total utility (TU) is the total satisfaction obtained from the consumption of all
possible units of a commodity.
For example, if the first orange gives you a satisfaction of 10 utils, second one gives
you 8 utils and third one gives you 6 utils, then total utility from three oranges = 10 + 8 + 6 =
24 utils. Total utility can be obtained by summing up marginal utilities from consumption of
different units of a commodity. Thus, total utility can be calculated as:

TUn = MU1 + MU2 + MU3 + ...... MUn (or)

TUn = ∑MU

Where, TUn = Total utility from n units of a given commodity

MU1, MU2, MU3, MUn = Marginal utilities from 1st, 2nd 3rd and nth unit of the commodity

1. TU increases when MU is positive

2. TU is maximum when MU is zero

3. TU falls when MU is negative

3.3 Marginal Utility

Marginal utility is the addition to the total utility derived from the consumption of an
additional unit of a commodity. It can also be defined as the utility from the last unit of a commodity
consumed.
Example.:
Suppose, a consumer gets total utility of 10 utils from consumption of one orange and 18 utils
from two oranges. He gets 8 utils from consumption of second orange. So, marginal utility of second
orange is 8 utils. If total utility derived from three oranges is 24 utils then marginal utility of three
oranges is 6 utils (i.e. 24-18 utils). In this case third orange is the last orange. Thus marginal utility of
3 oranges is 6 utils. Marginal utility can be calculated by the following formula:
MUn = TUn – TUn–1 (or)

MU =

Where
MUn = Marginal utility of nth unit of the commodity
TUn = Total utility of n units
TUn–1 = Total utility of n–1 units
Xn = Quantity of nth unit of good X
Xn–1 = Quantity or (n–1)th unit of good X
“n” takes the values 1, 2, 3, ... .

3.4 The law of Diminishing Marginal Utility (LDMU)

The LDMU states that ‘as more and more units of a commodity are consumed, marginal
utility derived from each successive unit goes on diminishing.’
Example.
Suppose, a thirsty man drinks water. The first glass of water he drinks will give him
maximum satisfaction (utility), say, 20 utils. Second glass of water will also fetch him utility but not
as much as the first one because a part of his thirst is satisfied by drinking the first glass of water.
Suppose he gets 10 utils from the second glass. It is just possible that he may get zero utility from the
third glass because his thirst has now been satisfied. There will be negative utility from the fourth
glass of water. Any rational consumer will not consume additional glass of water when it gives
disutility or negative utility.
Assumption of LDMU
The law of diminishing marginal utility operates under certain specific conditions. These
are called assumptions of the law.

1. Consumer should be a rational person

2. The cardinal measurement of utility
3. Time period of consumption should not be too long. Consumer’s tastes, habits, income etc.
may change if the time gap is more
4. Consumption should not proceed at intervals. It should be a continuous process
5. Quality of the commodity should not undergo any change.
6. The price of the substitute and complementary goods should not change.
 The relationship between total utility and marginal utility is explained with the help of
following table

The LDMU is graphically illustrated in the following figure

The relationship between total utility and marginal utility is explained in above table.
1. MU is the rate of change of TU. It means that Total Utility increases as long as marginal
utility is positive. In the above table marginal utility is declining between the range AB but is
positive. So total utility is increasing at decreasing rate.

2. Total Utility is maximum when marginal utility is zero. At point B, MU = 0, and the
corresponding point on TU is C where TU is maximum.

3. Total utility starts declining when marginal utility becomes negative (i.e., less than zero)
3.5 Exceptions to the Law of Diminishing Marginal Utility

Some of the important exceptions to the law are following:

1. A miser is not a good subject for this law. His desire for more wealth may in fact increase
with every successive increase in the accumulation of wealth.
2. A collector of rare articles like stamps, coins, paintings etc. may escape this law.
3. The law may not apply when it comes to a melody recital or a beautiful scenic view