What is the Law of Diminishing Marginal Utility (DMU)?

An individual decides the demand for a good based on its utility, ie, satisfaction derived from it. But what exactly is utility? The term utility refers to the need-satisfying capacity of a commodity. There are two types of utility measures: Total Utility and Marginal Utility.

Total Utility refers to the total satisfaction derived from consuming a fixed amount of commodity. Marginal Utility refers to the change that arises in total utility due to the consumption of additional units of the commodity. Marginal Utility derived from the consumption of units of the commodity is interrelated with Total Utility.

The phenomenon, ‘Diminishing Marginal Utility’ (DMU), refers to each additional unit of gain resulting in an even-smaller increase in the subjective value. This event is known as the Law of Diminishing Marginal Utility. According to this law, a commodity’s marginal utility decreases with each successive consumption of its consecutive units. In simple words, consumption of the first unit of the commodity is higher than the consumption of the fourth unit of the commodity.

For example, you have a packet of candies from which you consume three candies, which may delight your taste buds. However, after consuming nine to ten pieces, it may not be as delightful as the first three pieces consumed at the beginning

Importance of the Law of Diminishing Marginal Utility

Human wants are based on a characteristic of intensity. As we consume more of a commodity in succession, marginal utility from consumption of each additional unit of the commodity decreases. Below mentioned are some reasons that justify the importance of the Law of Diminishing Marginal Utility:

1. Basis of economic law: This law is the basic law of economics, which displays commodity consumption among consumers. Several other economic laws, such as the Law of Equi-Marginal Utility and the Law of Demand, are based on the ‘Law of Diminishing Marginal Utility.’
2. Diversity in consumption and production: As consumers, we always tend to find new things more appealing after consuming one product for a very long time. Producers often change the packaging. Pattern and design of the product keeping this law in mind. 
3. Taxation: The principle of increasing taxation is also based on the Law of Diminishing Marginal Utility. The rate of taxes increases on a person’s income as their income increases because the marginal utility of money falls to the rise of income of the person. 

Law of Diminishing Marginal Utility examples

As per the Law of Diminishing Marginal Utility, the marginal utility of a commodity diminishes upon the consumption of each successive unit, although total utility does not change. Here is an example of how the Law of Diminishing Marginal Utility works.

A hungry man decides to purchase five chapatis. Once the man consumes the first chapati, he gains a positive utility because he was quite hungry, and the first chapati was the first thing he consumed. Therefore, the marginal utility of the consumption of the first chapati will be high.

Upon eating the second chapati, the man’s appetite is further satisfied. His stomach  started getting full. The man may not be as starved as he was before. Hence, the second chapati may offer less interest and relief than the first chapati. The marginal utility from consuming the second chapati may increase at a diminishing rate. Upon consumption of the third chapati, the marginal utility may diminish even more as the man’s hunger is further satisfied.

Consumption of the fourth chapati may also experience even less marginal utility, and the man may feel discomfort from consuming more chapatis as his hunger is being satisfied. Finally, the consumption of the fifth chapati may not be possible as the man may feel full from consuming all the four chapatis. Hence the marginal utility from the fifth chapati may result in negative utility.

With the example mentioned above, five chapatis represent the ‘Law of Diminishing Marginal Utility’, which clearly states that more and more consumption of each successive unit of commodity results in diminishing marginal utility from each additional unit of commodity consumed. In a business, a company may benefit from having two accountants. However, if there is no requirement for an additional accountant in the company, hiring one may result in diminishing marginal utility.

The difference between Marginal Utility and Total Utility

Mentioned below are the significant differences between Total Utility and Marginal Utility:

Law of Diminishing Marginal Utility diagram:

Let’s assume that a person consumes six apples. The first apple consumed gives him 20 utils (util is a term used to measure utility). In contrast, the second and third apple consumed decreases the marginal utility with each additional apple consumed. This is because their desire to consume more apples decreases with each successive unit of apple consumed.

Let’s understand this concept more clearly with the help of a schedule and diagram:

Schedule for Law of Diminishing Marginal Utility:

In the schedule above, the total utility from the consumption of the first apple is 20 utils, which keeps on increasing until the person reaches their saturation point, i.e., the fifth apple. On the other hand, the marginal utility from the consumption of each additional apple keeps on diminishing. Upon the consumption of the sixth apple, the person has gone over the limit, and the marginal utility becomes negative, which results in a decrease in the total utility. Here is a diagram representation based on the schedule.

Types of Marginal Utility

Different types of marginal utilities are as mentioned below:

1. Positive marginal utility: Positive marginal utility refers to the highest amount of marginal utility derived from the consumption of a commodity. This phenomenon occurs when the consumption of more of a commodity brings additional satisfaction to the consumer. For example, if you like eating cake, the first slice of the cake will give you higher satisfaction than the second slice. Thus, marginal utility from having the first slice of cake is positive marginal utility. 
2. Zero marginal utility: Zero marginal utility refers to the marginal utility that occurs when the consumer has reached their saturation point. This phenomenon occurs when the consumption of additional commodity units brings no extra satisfaction to the consumer. For example, after consuming two slices of cake, you may feel full, and you may also not have any desire to have the third slice of cake. Thus, the marginal utility from consuming the third slice of cake at this stage becomes zero. 
3. Negative marginal utility: Negative marginal utility refers to the marginal utility that diminishes after consuming successive commodity units even after the saturation point. This phenomenon occurs when the consumer consumes additional units of a commodity resulting in negative marginal utility from the consumption of each successive unit of commodity. For example, the fourth slice of the cake may make you feel discomfort after utilising the third slice, resulting in negative marginal utility.
4. Law of Equi-Marginal Utility: Law of Equi-Marginal Utility states that a consumer should spend his limited income on different commodities in such a way that the last amount of money spent on each commodity yields equal marginal utility in order to get maximum satisfaction.

Conclusion

The Law of Diminishing Marginal Utility plays an important role in the economy. It directly relates to the consumption and production of goods. This law states that more of a commodity consumed will result in less satisfaction obtained from it. With the help of this law, we can conclude that, more of a commodity, goods or services consumed by a customer may result in less satisfaction derived from it, which is why the customers look for a change. This law also helps the producers design and create products according to the customers’ changing requirements.