Explained: Law of Diminishing Marginal Utility With Diagram

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

The Law of Diminishing Marginal Utility states that as a person consumes more of a good or service, the additional satisfaction (or utility) they derive from each additional unit decreases.

In simpler terms, the more of something you have, the less you value each additional unit. For example, the first slice of pizza might be incredibly satisfying, but as you eat more slices, your enjoyment of each additional slice gradually decreases.

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

Mathematical Explanation of the Law of Marginal Utility

Marginal Utility (MU) is the additional satisfaction a consumer gets from consuming one more unit of a good.

Formula:

 

$$\mathrm{MU}=\frac{∆\mathrm{TU}}{∆Q}$$

• MU = Marginal Utility

• ΔTU = Change in Total Utility

• ΔQ = Change in Quantity Consumed

Importance of the Law of Diminishing Marginal Utility (DMU)

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.

How Businesses use DMU law?
This principle helps businesses decide how much of a product to be offered and at what price. When companies know that customers get less satisfaction with each extra unit consumption, they can plan discounts, bundle offers, or offer product variations to keep interest high. For example, fast food combos or “buy one get one” deals use this logic to keep customers happy while increasing sales.

Assumptions of the Law of Diminishing Marginal Utility

The Assumptions of the Law of Diminishing Marginal Utility are:

1. Standard Size of Units: The law assumes that when consumers buy goods, they do so in standard amounts. This means they are consuming whole units, like eating an entire apple instead of just a slice.
2. Continuous Consumption: It is expected that consumers will keep using the product without taking breaks. This means they are consuming one unit right after another without delays.
3. Same Quality of Units: The law relies on the idea that all units of a product are the same in terms of quality. For instance, each apple a consumer eats should be similar in taste and size.
4. Rational Consumer: This principle applies only if the consumer acts logically. It means they make careful decisions about what and how much to consume based on their preferences
5. Stability of Preferences: The law assumes that a consumer’s tastes, likes, income, and habits do not change during the consumption process. This stability helps keep the law applicable.
6. Measurable Utility: The law works on the idea that consumers can express their satisfaction in measurable terms, often referred to as “utils.” This means they can quantify how much pleasure or satisfaction they get from consuming goods.
7. Single Purpose Consumption: According to this law, a consumer uses a product to satisfy one specific need or desire at a time, rather than trying to meet multiple needs with the same item.
8. Divisibility of Goods: This assumption means that the items can be split into smaller portions. This makes it easier and quicker for consumers to consume the goods, as they can take small amounts as needed.
9. Constant Value of Money Utility: Finally, the law assumes that the satisfaction derived from the money left after making a purchase is the same as the satisfaction from the total amount of money before spending. This helps keep the concept of utility consistent.

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.

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.

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.

Limitations of the Law of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility explains how the satisfaction you get from consuming additional units of a good tends to decrease as you have more of it. However, there are several situations where this law doesn’t apply:

1. Very Small Units: When the quantities of goods are very small, this law doesn’t hold true. For instance, if you’re tasting just a tiny bit of something, each additional tiny taste might not lead to less satisfaction.
2. Dissimilar Units: The law assumes that the units consumed are similar in size and quality. If you’re consuming items that differ greatly, like a chocolate bar compared to a piece of fruit, the law may not apply since each item offers a different level of satisfaction.
3. Long Breaks Between Consumption: If there’s a long gap between using the same product, the law may not work. For example, if you eat pizza today and don’t have any again for weeks, the satisfaction from eating it might not diminish in the same way it would if you had it daily.
4. Mentally Unstable Individuals: In some cases, like with people who are drunk or under the influence of drugs, each additional drink or dose may actually bring more satisfaction, which goes against the law. Their perception of satisfaction can be skewed, so the normal rules don’t apply.
5. Rare Collections: For hobbies such as collecting rare coins or stamps, the satisfaction often increases with each new item added to the collection. Instead of feeling less satisfied with more, collectors usually feel more joy as their collection grows.
6. Money: Money is a unique case. Unlike other goods, both wealthy and less wealthy people often desire more money. The saying goes, “the more you have, the more you want.” Thus, the Law of Diminishing Marginal Utility doesn’t really fit when it comes to money.

The difference between Marginal Utility and Total Utility

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

Written and Reviewed by:

Priyanka Rao

Author

Priyanka Rao is a content strategist for Jupiter.Money, and specializes in writing on topics related to finance, banking, budgeting, salary & wages, and other financial matters. She has a passion for creating engaging content that resonates with audiences across various digital platforms. In her free time, Priyanka enjoys traveling and reading, which allows her to gain new perspectives and inspiration for her work. With a keen eye for detail and a creative mindset, Priyanka is committed to creating content that connects well with her readers, enhancing their digital experiences.