The Law of Diminishing Marginal Utility Explained (2022)

The law of diminishing marginal utility explains that as a person consumes an item or a product, the satisfaction or utility that they derive from the product wanes as they consume more and more of that product. For example, an individual might buy a certain type of chocolate for a while. Soon, they may buy less and choose another type of chocolate or buy cookies instead because the satisfaction they were initially getting from the chocolate is diminishing.

In economics, thelaw of diminishing marginal utilitystates that themarginal utilityof a good or service declines as more of it is consumed by an individual. Economic actors receive less and less satisfaction from consuming incremental amounts of a good.

Key Takeaways

  • The law of diminishing marginal utility explains that as a person consumes an item or a product, the satisfaction (utility) that they derive from the product wanes as they consume more and more of that product.
  • Demand curvesare downward-sloping in microeconomic models since each additional unit of a good or service is put towarda less valuable use.
  • Salespeople often use different methodologies of soliciting sales as different customers will have different reasons for purchasing a single quantity of an item.
  • Marketers use the law of diminishing marginal utility because they want to keep marginal utility high for products that they sell.
  • There are several laws of diminishing marginal units, each of which is different but tangentially related across the life cycle of a product.

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(Video) The Law of Diminishing Marginal Utility Explained in One Minute: From Definition to Examples

Law Of Diminishing Marginal Utility

Understanding the Law of Diminishing Marginal Utility

Whenever an individual interacts or consumes an economic good, that individual acts in a way that demonstrates the order in which they value the use of that good. Thus, the first unit that is consumed satisfies the consumers' greatest need. The second unit satisfies results in a lesser amount ofsatisfaction. and so on.

As another example, consider an individual on a deserted island who finds a case of bottled water that washes ashore. That person might drink the first bottle indicating that satisfying their thirst was the most important use of the water. The individual might bathe themselves with the second bottle, or they might decide to save it for later.

If they save it for later, this indicates that the person values the future use of the water more than bathing today, but still less than the immediate quenching of their thirst. This is called ordinal time preference. This concept helps explain savings and investing versus current consumption and spending.

The example above also helps to explain whydemand curvesare downward-sloping in microeconomic models since each additional unit of a good or service is put towarda less valuable use.

Consumption of a good often begins with an increasing marginal utility for every good consumed followed by decreasing marginal utility for later units consumed.

(Video) Diminishing Marginal Utility I A Level and IB Economics

Diminishing Marginal Utility Examples

The law of diminishing marginal utility is not specific to any industry. Its broad concept relates to different sector in different ways. In general, it is statistically proven that consumers exert more caution and attention when faced with higher utility propositions. Here are some ways diminishing marginal utility influences processes along a business process.

Sales

The technique of selling goods dramatically changes depending on the consumer's current marginal utility potential. Consider a salesperson who is selling you your first cell phone. With your marginal utility very high with any working cell phone, the sale is easy. However, if you already own a cell phone, the tactics used by the salesperson (i.e. suggesting a different phone for work, suggesting a backup phone, suggesting upgrading your existing model) will differ.

Though not directly to the saying "read the room", the concept of diminishing marginal utility is very relatable as not every client will associate the same utility of a given product. Some consumers (i.e. those allergic to peanut butter) may have negative utility while most people will have positive marginal utility when offered a single free peanut butter and jelly sandwich.

Manufacturing/Inventory Management

Companies must be mindful of the law of diminishing marginal utility when planning future periods of production. It can't always rely on historical manufacturing levels, as changes in consumer demand will impact the number of goods needed.

This concept is especially important for companies that tend to carry inventory. The law of diminishing marginal utility can produce a very steep drop-off. Again, consider the use of cell phones. Many people only need one; there is an incredibly large jump in utility from owning zero cell phones to owning one cell phone. Should a market become quickly saturated with people who all own cell phones, a company may be stuck holding inventory.

(Video) Law of Diminishing Marginal Utility - Explained with Example.

Marketing

Marketers use the law of diminishing marginal utility because they want to keep marginal utility high for products that they sell. A product is consumed because it provides satisfaction, but too much of a product might mean that the marginal utility reaches zero because consumers have had enough of a product and are satiated. Of course, marginal utility depends on the consumer and the product being consumed.

This is an important concept for companies that has a diverse product mix. Imagine your favorite coffee shop. If the shop only marketed a single product, consumers would likely grow tired of that product as their marginal utility would diminish. Marketing professionals must juggle piquing demand for a variety of products to keep consumers interested in numerous products.

Some units may have zero marginal utility for the second unit consumed. For example, if you already own a copy of a magazine, there's very little to no utility in owning a second copy. In these situations, the diminishing marginal utility has decreased 100% between units.

Diminishing Marginal Utility vs. Other Measurements

The law of diminishing marginal utility should not be confused with other laws of diminishing marginal units:

  • Diminishing marginal utility focuses on the consumer aspect and the decreasing nature of demand over time.
  • Diminishing marginal productivity focuses on the manufacturing aspect and the decreasing nature of production over time.
  • Diminishing marginal return focuses on the merchant aspect and the decreasing nature of profits over time.

The law of diminishing marginal productivity states that the efficiency gained on slight process improvements may yield incremental benefits for additional units manufactured. An example of diminishing marginal product is labor costs to manufacture a car. It is more profitable to lay off 10% of the manufacturing staff, and the manufacturing line may still make do with the remaining resources for the first few vehicles. However, after a while, the marginal manufacturing benefit decreases due to staff shortages.

(Video) The law of Diminishing Marginal Utility. (DMU)

The law of diminishing marginal revenue states that once maximum efficiency is reached, the amount of profit earned per unit will decrease. This can be due to a saturated nature of demand (i.e. diminishing marginal utility for consumers) or escalating production costs (i.e. diminishing marginal product for production). Though all three laws are different, each carries with it concepts of economies of scale and is interrelated in the scope of the entire life cycle of a product.

What Is Meant By Marginal Utility?

Marginal utility is the benefit a consumer receives by consuming one additional unit. The benefit you receive for consuming every additional unit will be different, and the law of diminishing marginal utility states the benefit will eventually begin to decrease. The first slice of pizza you eat may be delicious, but the 15th slice may be a little painful.

What Is the Importance of the Law of Diminishing Marginal Utility?

The law of diminishing marginal utility dictates many aspects of how a company operates. A company must adjust how many goods it carries in inventory as well as its sales tactics because of the law. In addition, a company's marketing strategy often revolves around balancing the marginal utility across product lines.

What Is the Formula for Marginal Utility?

Marginal utility is calculated by subtracting the total marginal utility from each other across two quantity levels. For example, owning a single dog may have a marginal utility of 100, and owning a second dog may have a marginal utility of 120. Therefore, the marginal utility of owning a second dog is 20.

(Video) Diminishing Marginal Utility

Can Marginal Utility Be Zero?

Yes, marginal utility not only can be zero but it can drop to below zero. Consider a summer barbeque. If you haven't had breakfast yet, that first hot dog will be delicious and the second one won't be bad either. After a while, you'll become adverse eating hot dogs and may even get sick (have negative utility) if you continue to eat more.

FAQs

How do you explain the law of diminishing marginal utility? ›

The law of diminishing marginal utility holds that as we consume more of an item, the amount of satisfaction produced by each additional unit of that good declines. The change in utility gained from utilizing an additional unit of a product is known as marginal utility.

What is the law of diminishing marginal product answer? ›

An economic rule governing production which holds that if more variable input units are used along with a certain amount of fixed inputs, the overall output might grow at a faster rate initially, then at a steady rate, but ultimately, it will grow at a declining rate.

Which of the following best explain diminishing marginal utility concept? ›

Explanation: Law of diminishing marginal utility states that as and when a consumer consumes more and more of a product, the satisfaction derived from the subsequent units consumed falls.

How do you explain marginal utility? ›

Marginal utility is the added satisfaction that a consumer gets from having one more unit of a good or service. The concept of marginal utility is used by economists to determine how much of an item consumers are willing to purchase.

What is the law of diminishing of marginal returns explain with example? ›

For example, if a factory employs workers to manufacture its products, at some point, the company will operate at an optimal level; with all other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations.

What is the law of diminishing marginal utility in microeconomics? ›

The "Law of Diminishing Marginal Utility" states that for any good or service, the marginal utility of that good or service decreases as the quantity of the good increases, ceteris paribus. In other words, total utility increases more and more slowly as the quantity consumed increases.

What is the law of diminishing marginal utility quizlet? ›

The law of diminishing marginal utility states that as more units of a good are consumed, the marginal utility from the consumption of the next unit becomes lesser.

Who the law of diminishing marginal utility was first explained by? ›

The British economist Alfred Marshall believed that the more of something you have, the less of it you want. This phenomenon is referred to as diminishing marginal utility by economists.

Why is the law of diminishing marginal utility Important? ›

This law helps the producer in increasing sales. The producer reduces the price of the product for the purpose of increasing sales. The consumers purchase more quantity of that product to obtain maximum satisfaction given their income. As they buy more quantities the marginal utility of the last rupee diminishes.

Which best expresses the law of diminishing marginal utility? ›

Explanation: The law of diminishing marginal utility is best expressed by the decrease in the additional satisfaction with the increase in the units of the output consumed by an individual.

What is utility very short answer? ›

Utility, in economics, refers to the usefulness or enjoyment a consumer can get from a service or good. Although the concept of utility is abstract, it is a useful way to explain how and why consumers make their decisions. "Ordinal" utility refers to the concept of one good being more useful or desirable than another.

What is marginal utility explain with diagram? ›

Key terms
TermDefinition
marginal utilitythe change in total utility that a consumer experiences when one more unit of a good is consumed
law of diminishing marginal utilitythe observation that as more units of a good are consumed the amount of happiness derived from each additional unit decreases as consumption increases
6 more rows

What is a real life example of marginal utility? ›

Marginal utility is a tool that measures the amount of satisfaction a consumer gets after consuming or purchasing an additional item. For example, if a customer at a watch shop purchased one watch, they might measure the marginal utility of purchasing a second brand-new watch.

Can you explain the law of diminishing returns with a real life example? ›

Law of Diminishing Returns to Scale

A return to scale is when all inputs are increased in order to increase the total output. One example is adding a second shift at a factory in order to increase production. However, it does not always increase production in the same way. For example, a bakery has excellent business.

What is the law of diminishing marginal product with diagram? ›

The law of diminishing marginal productivity states that when an advantage is gained in a factor of production, the productivity gained from each subsequent unit produced will only increase marginally from one unit to the next.

What are the types of diminishing marginal utility? ›

The main types of marginal utility include positive marginal utility, zero marginal utility, and negative marginal utility. Consumers often experience higher marginal utility when marginal cost is lower.

What is the meaning of diminishing in economics? ›

In economics, diminishing returns is the decrease in marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal (ceteris paribus).

What is marginal returns in simple words? ›

Marginal Return is the rate of return for a marginal increase in investment; roughly, this is the additional output resulting from a one-unit increase in the use of a variable input, while other inputs are constant.

What is law of diminishing marginal utility give a numerical example? ›

So, ΔGood 2ΔGood 1 tends to decline as we move along the IC curve from the left to the right. This happens due to the law of diminishing marginal utility. It is because of the diminishing MRS that the indifference curve is convex to the origin. Example: CombinationApplesOrangesMRSA110−B273:1C352:1D441:1.

Is the law of diminishing marginal utility always true? ›

If the quality of the goods increase or decrease, the law of diminishing marginal utility may not be proven true. Consumption of goods should be continuous. If there comes a substantial break in the consumption of goods, the actual concept of diminishing marginal utility will be altered.

What causes diminishing marginal product? ›

Key Points. Diminishing Marginal Returns occur when an extra additional production unit produces a reduced level of output. Some of the causes of diminishing marginal returns include: fixed costs, limited demand, negative employee impact, and worse productivity.

What do you mean by law of diminishing marginal utility by Brainly? ›

Answer: . The Law Of Diminishing Marginal Utility states that all else equal as consumption increases the marginal utility derived from each additional unit declines. Marginal utility is derived as the change in utility as an additional unit is consumed.

What is the conclusion of law of diminishing marginal utility? ›

The law of diminishing marginal utility says that everything, if not equal to consumption, will increase the marginal utility procured from every additional declined unit. The marginal utility might drop down below zero to a negative utility when the situations are completely unfavourable for consuming products.

What is explained by the law of diminishing marginal utility quizlet? ›

Law of Diminishing Marginal Utility indicates that gains in satisfaction become smaller as successive units of a specific product are consumed. or satisfaction declines as a consumer acquires additional units of a given product. meaning the more of that product the obtain, the less the want still more of it.

What is the best explanation of the economic term utility? ›

In economics, the term utility refers to the happiness, benefit or value a consumer gets from a good or service. In other words, consumers are not satisficers who will settle for "good enough". This happiness or satisfaction is measured in a unit called a util.

Which of the following best explain diminishing marginal utility concept quizlet? ›

Which best expresses the law of diminishing marginal utility? (b) The more a person consumes of a product. the smaller becomes the additional utility that she receives as a result of consuming an additional unit of the product.

What is an example of diminishing marginal utility in real life? ›

Food is a common example of a good with diminishing marginal utility. Think of an apple, for example. If you're starving, an apple offers pretty high value. But the more apples you eat, the less hungry you become — Making each additional apple less valuable.

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