The Principle of Diminishing Marginal Utility was developed by Marshall and is also known as Marginal Utility Analysis. It is accepted as The Basis Of Demand Analysis or Quantitative Demand Analysis.
According to The Principle of Diminishing Marginal Utility when the consumer is consuming continuously different units of a particular product in a given time, given income, given tests and preferences, given prices of the substitute products, it is observed that in this situation Total Utility for the Consumer increases but at a diminishing rate. Therefore, marginal utility of the consumer is diminishing. For this reason this principle is known as The Principle of Diminishing Marginal Utility.
In this principle, we get fundamental distinction between Total Utility and Marginal Utility.
Total Utility is the aggregate satisfaction the consumer is getting from the consumption of different units of a particular product.
On the other hand Marginal utility is the additional satisfaction, a consumer is getting from the consumption of one more additional unit of the product.
Therefore marginal utility is the Rate at which total utility of the consumer goes on increasing with the increase in consumption of different units of a particular product.
Fundamental Conditions or Hypothesis or Assumptions of The Principle of Diminishing Marginal Utility:
1. The consumption activity will go on continuously.
2. During the time of consumption income parameter remains unchanged.
3. During the time of consumption tests and preferences of the consumer remain unchanged.
4. During the time of consumption crisis of the substitute products remain unchanged.
These conditions are also known as The Fundamental Conditions of Law of Demand which is popularly known as Demand Analysis or Quantitative Demand Analysis. Therefore it is concluded that the Marginal Utility Analysis must be accepted as the basis of Demand Analysis or Quantitative Demand Analysis.