The law as propounded by Marshall expresses a universal human nature and experience. The more a consumer has of anything, the less important one unit of it becomes to him.
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However, there are many situations in which this law cannot be applied. Moreover, the assumptions on which the law is based may not be fulfilled in real life. Some of the limitations are:
(a) Suitable Units:
The law of diminishing MU holds good only if units of the commodity supplied to the consumer are in suitable units. A unit must be complete for its consumption or use. The commodity should not be consumed in very small units. For example, the law does not hold good for a single shoe.
Similarly, a holiday of a very short duration may intensify the desire for it leading to increasing MU. The law will fail to apply in this case. Further, when water is offered in tea spoons to a thirsty person, the utility derived by him from the second spoon of water may be higher than that of the first one.
(b) Commodity Satisfying Different Wants:
If a commodity is capable of satisfying different wants, the intensity of consumer of a particular want diminishes, but, the units of the commodity can be used for the satisfaction of other wants. Thus, the marginal utility of the commodity may not diminish.
(c) Anticipated Availability of Commodity:
If a consumer believes rightly or wrongly that the availability of the commodity would fall in future, its MU goes up.
(d) Capacity to Enjoy a Commodity:
The law of diminishing MU fails to hold good if the capacity of a person to enjoy a commodity undergoes a change during its consumption. A person listening to a music can appreciate it better with second or third hearing.
(e) Change in Availability of Related Commodities:
Some commodities are jointly used for the satisfaction of a want, known as complementary commodities. In this case, availability of one of them in isolation is useless. However, its availability raises the utility of its complementary commodity.
Some common examples are, pen and ink, scooter and petrol, etc. As against complementary commodities, substitute commodities are used for satisfying the same want. For example, tea and coffee.
The availability of a commodity decreases the utility of its substitute commodity. Utility analysis assumes independence of utilities. But, existence of complementary and substitute goods does affect the utility of the commodity under consideration.
(f) Position in Relation to Other Persons:
Man lives in society. His desire to possess and consume various commodities and services is influenced by his position in the society. Thus, the utility of commodity to a person changes, when its availability to other members of society undergoes a change.
(g) Misers and Drunkards:
All laws of Economics including the law of diminishing marginal utility are applicable to normal and rational persons. Hence, like other economic laws, this law does not hold true in case of abnormal persons like misers and drunkards.
The miser gets increasing marginal utilities from additional units of money, as the more money he has, the greater is the desire to acquire more of it. Even here, it is difficult to believe that the marginal utility of the thousandth rupee is more than that of the first rupee.
Moreover, the fact that the miser spends an amount, how so ever small it may be on food and not on acquiring additional money indicates that the utility to him of food and clothes is greater than that of money which he spends to buy these goods.
Further, when a person consumes liquor, opium, narcotics, drugs, etc., he no longer remains rational person. Due to change in his mental stage, he loses the power of reasoning and he is not in a position to evaluate utility derived from different units of the commodity.
Such intoxicated person may feel that each additional unit of the commodity is giving higher and higher utility to him. However, a careful analysis would reveal that after a certain stage marginal utility will turn zero and will be negative eventually.
(h) Rare Collections:
Hobbies of collection of rare coins, stamps, paintings, antiques and other articles of distinction, add to the enjoyment of collector more than proportionately. It enhances social pride and the law of diminishing marginal utility loses its relevance. However, a close look would tell that here collectors are not interested in collecting homogenous things. They collect different varieties of coins, stamps, paintings, antiques, etc. If identical pieces of the collection are repeatedly acquired by the collector, the marginal utility will definitely decline.
(i) Other Limitations:
The assumptions of cardinal utility of money and constant marginal utility of money are also subject to question. The utilities derived from various commodities cannot be measured objectively. Further, with increase in income, the marginal utility of money changes.