On what grounds is the law of diminishing marginal utility being criticized by the modern economists?

Criticism of the Law of Diminishing Marginal Utility by Modern Economists

The Law of Diminishing Marginal Utility is a fundamental principle in economics that states that as a consumer consumes more units of a good or service, the additional satisfaction (marginal utility) derived from each successive unit decreases. While historically significant, this law has faced criticism from modern economists on several grounds.

1. Subjectivity of Utility

One of the primary criticisms is the inherent subjectivity of utility. The law assumes that it is possible to measure utility in quantifiable terms, which modern economists argue is not feasible due to the subjective nature of satisfaction. Different individuals derive varying levels of satisfaction from the same good, and this satisfaction cannot be universally measured or compared.

2. Inconsistent with Indifference Curve Analysis

Modern economic theory, which relies heavily on indifference curve analysis, suggests that utility is ordinal (rankable) rather than cardinal (measurable in units). This approach contradicts the Law of Diminishing Marginal Utility, which is based on the cardinal measurement of utility. Indifference curves demonstrate consumer preference without requiring a quantifiable measure of utility, challenging the law’s applicability.

3. Assumption of Constant Consumption Context

The law assumes a constant consumption context, meaning that the circumstances under which consumption occurs do not change. Modern economists argue that this is unrealistic, as the context of consumption (like mood, environment, and social factors) can significantly affect the utility derived from each additional unit.

4. Neglect of Complementary and Substitute Goods

The law does not adequately account for the effects of complementary and substitute goods on utility. The satisfaction derived from consuming a good can increase if a complementary good is also consumed, or it can change with the availability of substitutes. This interdependence of goods in affecting utility challenges the law’s premise.

Conclusion

While the Law of Diminishing Marginal Utility has been foundational in economic theory, modern economists criticize it for its assumptions about the measurability and constancy of utility, and its lack of consideration for the consumption context and the interdependence of goods. These criticisms have led to the development of more nuanced theories that better reflect the complexities of consumer behavior.