What is the Law of Diminishing Marginal Utility?
The Law of Diminishing Marginal Utility states that the amount of satisfaction provided by the consumption of every additional unit of a good decrease as we increase the consumption of that good. Marginal Utility is the change in the utility derived from the consumption of an additional unit of a good.
Law of Diminishing Marginal Utility Graph
If we were to represent the law of diminishing marginal utility using a graph, it would look like the figure below. In this figure, the x-axis represents the number of units of a good consumed and the y-axis represents the marginal utility of that good. Notice that as we increase the number of units, the marginal utility of every additional unit falls. It keeps falling until it becomes zero and then further falls to become negative. It means that after a certain point, consuming that good is going to cause dissatisfaction to the consumer.
Examples of Law of Diminishing Marginal Utility
Let us understand the concept first using some very basic examples of the law of diminishing marginal utility.
Suppose if a person is very hungry and has not eaten any food all day. When he finally starts to eat, the first bite will give him a lot of satisfaction. As he keeps on eating more and more food, his appetite will go down and come to a point where he does not want to eat anymore.
Suppose there is a manufacturer who has a huge demand for his products. To meet this demand the manufacturer will employ more workforce. But eventually, there will come a point where hiring more workers does not really benefit the organization. In fact, hiring more workers just brings down the production per worker since the quantity demanded was being met by a lower number of workers. This example illustrates the law of diminishing marginal utility because after a certain point, hiring additional workers is not going to benefit the organization.
Assumptions of Law of Diminishing Marginal Utility
- Rational Consumers – It requires consumers to behave rationally. They should make rational decisions at all times. The law assumes that consumers are trying to maximize utility at all times subject to their incomes.
- Continuous Consumption – This assumption is very important for the law to hold true. It means that the consumer is continuously consuming every additional unit of the good. There should not be intervals between the consumption of additional units. For example, if a hungry person eats a pizza for lunch and then eats more pizza for dinner, the law is violated because the consumer is again hungry and deriving increased utility from the second pizza than he would if he was eating it right after lunch. So intervals between consumption of additional units lead to violation of the law.
- Standard Size of Units – TThe size of every unit should be standard. If a person drinks half of a glass of water, drinking another half glass after it might not diminish the utility since he has not yet derived the total utility from consuming a full unit of the good being consumed here. Reducing the size of units consumed is not consistent with the law of diminishing marginal utility.
Exceptions of Diminishing Marginal Utility
- Addictions/Hobbies – This law does not hold in case of addictions. The marginal utility of having an additional glass of alcohol does not decrease for an alcoholic. Similarly, in the case of hobbies, a person who likes to paint might not experience diminishing marginal utility on making a new painting.
- Rare Items – It also does not hold true in the case of rare items. This is especially true for enthusiasts who chase such items and are really passionate about them. For example, acquiring a limited edition watch might give much more satisfaction to an enthusiast who likes collecting watches and already has a lot of them.
- Unrealistic Assumptions – Assumptions made by this law don’t always hold true. A consumer might make an irrational decision, there could be intervals between the consumption of units of a good, etc. The violation of these assumptions might cause the law to not hold for a certain situation.
The law of diminishing marginal utility is a very widely studied concept in the world of economics. It helps us understand why a consumer is less and less satisfied with the consumption of every additional unit of a good. The law is based on the ordinal theory of utility and requires certain assumptions to hold true. However, there are exceptions to the law as it might not hold true in some cases.
This has been a guide to what is the law of diminishing marginal utility and its definition. Here we discuss examples of the law of diminishing marginal utility along with assumptions, graphical representation, and exceptions. You can learn more from the following articles –