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Thus when the consumer consumes a commodity continuously, the marginal utility declines, reaches zero and then becomes negative. As we move along the curve from left to right, we see that the marginal utility gradually decreases, eventually reaching zero at a certain point. Beyond that point, consuming additional units of the good may even lead to negative utility, where overall satisfaction decreases. This means that after a certain point, the consumer may experience dissatisfaction from consuming more of the good. The Law of Diminishing Marginal Utility illustrates that with each successive unit, the person consumes of a good or service, additional satisfaction derived by each unit will eventually decline. That is, the first slice of pizza might be a heaven of satisfaction, but when the quantity consumed increases to four slices or five slices, satisfaction from another slice starts to diminish.

Assumptions of Law of Diminishing Marginal Utility

For example, if you already own a copy of a magazine, there’s no utility in owning a second copy. In these situations, the marginal utility has decreased 100% between units. Marketers want to keep marginal utility high for the 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.

Total Utility increases with consumption, but at a decreasing rate, while Marginal Utility refers to the additional satisfaction from consuming one more unit, which eventually declines. The law of diminishing marginal productivity states that the efficiency gained on slight process improvements may yield incremental benefits for additional units manufactured. The law of diminishing marginal utility means that you’ll get less satisfaction from each additional unit of something as you use or consume more of it. The law of diminishing marginal utility also won’t apply if the commodity being considered is money. The utility of money doesn’t decrease as a person acquires more of it.

However, there are exceptions to the law as it might not have the truth in some cases. Overall, the Law of Diminishing Marginal Utility explains why individuals tend to consume less of a good as the marginal utility of each additional unit consumed decreases over time. The Law of Diminishing Marginal Utility states that as a person consumes more units of a good or service, the satisfaction or utility derived from each additional unit decreases. The law of diminishing marginal utility helps explain why consumers are generally less and less satisfied with each additional unit of a product that they consume.

A consumer has less money to spend on other commodities after paying for the commodity. This process increases the MU of money for the consumer and makes the remaining cash dearer to them. It is assumed that the MU of money is constant since the MU of a commodity must be measured in monetary terms. The law of diminishing marginal utility directly impacts a company’s pricing because the price charged for an item must correspond to the consumer’s marginal utility and willingness to consume or use the good.

CSK have lost all the matches where Dhoni scored runs thus far in IPL 2025.

This has given them satisfaction, as is evident through countless social media fanatics and gate-crashers. IPL 2024 was the year when the level of satisfaction to see more of Dhoni peaked as his strike-rate was a staggering 220.54, which included 13 sixes, his most since 2020 in a single edition. In this scenario, the person is indicating a clear priority for the use of the water. The two effects are called the ‘income effect’ and ‘substitution’ effect. No, there are exceptions such as Giffen goods, Veblen goods, and addictive substances, where the law might not hold true. An example of diminishing marginal productivity is related to the labor costs for manufacturing a car.

While the marginal utility starts to decline from the second unit onwards, it is possible that, for certain goods,marginal utility rises at first before diminishing. In the case ofa set of six antique dining chairs, an individual may alreadyhave five, and finding and purchasing the sixth in the set may well provide moreutility than the first! Similarly, for many different reasons, watchinga movie for the second time may provide more entertainment than thefirst watching. The urge to buy a new phone is the highest at the time of purchase but after a couple of months of usage, the level of pleasure derived from using that phone decreases. The usage may still be on a routine basis, but the excitement that comes with using it initially vanishes. This clearly shows an example of the Law of Diminishing Marginal Utility.

Thus, according to this law, the marginal utility decreases with the increase in the consumption of a commodity. When marginal utility decreases, the total utility increases at a diminishing rate. In other words, it shows that the more a person consumes a product, the lesser satisfaction he or she will derive from each additional unit. This law plays a major role in understanding consumer behavior, pricing, and decision-making in economics. The table shows that when a consumer consumes the first unit of a commodity, he/she obtains 10 utils of total utility. As the second unit is consumed, MU is 8 units whereas TU is increased to 18 from 10 utils.

In a similar way, if prices of substitutes to good X are constant, a lower price of good Xwill encourage consumers to switch to good X. In the above diagram, the units of apples are displayed on the X-axis and the MU on the Y-axis. When he finally starts to eat, the first bite will give him a lot of satisfaction.

Indifference Curves

You’re so full from the first four slices that consuming the last slice of pizza would result in negative utility. It’s entirely unfavorable to consume another unit of any product at this point. The first unit of consumption for any product is therefore typically the highest. Every unit of consumption to follow holds less and less utility after that. The law of diminishing marginal utility has limitations like possessing smaller commodity units.

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• Therefore, they must price their products in such a way that the consumer is willing to pay for the additional units.
• The utility of money doesn’t decrease as a person acquires more of it.
• In this way, the additional utility (marginal utility) from the extra units will go on decreasing.
• Yes, the Law of Diminishing Marginal Utility can be applied to any good or service that a person consumes, including food, clothing, electronics, and more.

A company might benefit from having three accountants on its staff but hiring an additional person results in a diminished utility due to the minimum benefit gained if there’s no real need for a third. Hiring a new administrative assistant has a higher level of utility than hiring a third accountant if you have two accountants but no one to process paperwork. You gain a certain amount of positive utility from eating when you consume the first slice.

• The utility can be measured in different ways, such as through surveys, experiments, or consumer choices.’Utils’ is considered as the measurable ‘unit’ of utility.
• It can be used by businesses to find a balance between supply and production.
• The table shows that when a consumer consumes the first unit of a commodity, he/she obtains 10 utils of total utility.

As you consume more, you will reach a point where you will need another chapatti where the marginal utility will be zero. After that, if you are forced to eat even one more chapatti, it will lead to disutility. The Law of Diminishing Marginal Utility causes such a decrease in satisfaction with successive unit consumption. You experience a diminished marginal utility with the fourth slice of pizza as well. It might be difficult to eat because you’re already full from the first three slices.

Indifference Curves and Consumer Equilibrium

Businesses use the concept to determine the optimal price of their products. They understand that the more a consumer consumes a good, the less satisfaction they derive from each additional unit of the good. Therefore, they must price their products in such a way that the consumer is willing to pay for the additional units. The law of diminishing marginal utility states that the amount of satisfaction provided by the consumption of every additional unit of good decreases as we increase that good’s consumption.

Thus, the consumer gets maximum satisfaction when MU is zero and that point is known as the point of saturation. The law of diminishing marginal utility states that the marginal utility derived from each additional unit declines as consumption increases, all else being equal. Marginal utility is the incremental increase in utility that results from the consumption of one additional unit. “Utility” is an economic term that’s used to represent satisfaction or happiness.

If the consumer continues to take more apples, marginal utility falls to zero and then becomes negative. With much higher value items which are boughtinfrequently and are not identical – such as a house or a car – diminishingmarginal utility seems a far less relevant principle. The Law of Diminishing Marginal Utility has several applications in economics. One of the most important applications is in the pricing of goods and services.

The utility can be measured in different ways, such as through surveys, experiments, or consumer choices.’Utils’ is considered as the measurable ‘unit’ of utility. The concepts of Total Utility and Marginal Utility are indispensable for understanding how utility functions work. Total utility is described as the overall satisfaction obtained from consuming a certain quantity of a good, while marginal utility refers to the satisfaction obtained from consuming one more unit of that good. Some units may have zero marginal utility for the second unit consumed.

In short, the more of a thing you have, the less you want to have more of it. In the above diagram, TU stands for the total utility curve and MU stands for the marginal utility curve. When the consumer consumes the first unit of commodity, s/he derives 10 utils of utility and both TU and MU are the same. When the consumer consumes the second unit of goods, TU becomes 18 utils and MU decreases to 8 utils. The Law of Diminishing Marginal Utility states that the additional utility gained from an law of diminishing marginal utility given by increase in consumption decreases with each subsequent increase in the level of consumption.