Law Of Diminishing Marginal Utility

Loading the player...

What is the 'Law Of Diminishing Marginal Utility'

The law of diminishing marginal utility is a law of economicsĀ stating that as a person increases consumption of a product, while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

BREAKING DOWN 'Law Of Diminishing Marginal Utility'

This is the premise on which buffet-style restaurants operate. They entice you with "all you can eat," all the while knowing each additional plate of food provides less utility than the one before. And despite their enticement, most people will eat only until the utility they derive from additional food is slightly lower than the original.

For example, say you go to a buffet and the first plate of food you eat is very good. On a scale of ten you would give it a ten. Now your hunger has been somewhat tamed, but you get another full plate of food. Since you're not as hungry, your enjoyment rates at a seven at best. Most people would stop before their utility drops even more, but say you go back to eat a third full plate of food and your utility drops even more to a three. If you kept eating, you would eventually reach a point at which your eating makes you sick, providing dissatisfaction, or "dis-utility."

RELATED TERMS
  1. Total Utility

    The aggregate level of satisfaction or fulfillment that a consumer ...
  2. Marginal Utility

    The additional satisfaction a consumer gains from consuming one ...
  3. Utilities Sector

    A category of stocks for utilities such as gas and power. The ...
  4. Law of Diminishing Marginal Returns

    A law of economics stating that, as the number of new employees ...
  5. Expected Utility

    An economic term summarizing the utility that an entity or aggregate ...
  6. Utility Revenue Bond

    A type of municipal bond that is issued to finance utility projects, ...
Related Articles
  1. Economics

    Economics Basics: Utility

    Investopedia explains the concept of utility, an abstract concept where the units that assign an amount of utility are arbitrary and are only used for representing relative value.
  2. Economics

    Law Of Diminishing Marginal Utility

    Learn about this law of economics related to consumption.
  3. Economics

    Explaining Marginal Utility

    Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or service.
  4. Professionals

    Marginal Benefit and Marginal Cost

    Marginal Benefit and Marginal Cost. Learn about the Law of Diminishing Marginal Utility in regards to marginal costs and benefits to the consumer.
  5. Sectors

    The Debt Report: The Utilities Sector

    Discover how blue chip U.S. utilities companies are using debt, and why it was important for the industry to deleverage after the financial crisis.
  6. Economics

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  7. Mutual Funds & ETFs

    5 Popular Utilities ETFs in 2016 (XLU, NEE)

    Discover how the five most popular utilities ETFs for 2016 can add growth and income to your portfolio. Four of these utilities ETFs outperformed the S&P 500.
  8. Economics

    Macroeconomics: Supply, Demand and Elasticity

    By Stephen Simpson DemandDemand is driven by utility – the pleasure or satisfaction that a consumer obtains from consuming a good or service. Total utility is a function of the quantities ...
  9. Mutual Funds & ETFs

    ETF Flows: Utilities ETFs Stand Tall in 2016

    Find out which utilities exchange-traded funds (ETFs) have benefited the most from the huge surge in fund inflows in the early part of 2016.
  10. Budgeting

    A Day Without Spending, A Lifetime's Worth Of Lessons

    Financial guru Suze Orman once challenged her fans to go a day without spending any money. Here are the lessons learned from this exercise.
RELATED FAQS
  1. What does marginal utility tell us about consumer choice?

    Learn how marginal utility influences consumer choice under the law of diminishing marginal utility and consumer decisions ... Read Answer >>
  2. How do businesses calculate their marginal utility?

    See why, even though businesses do not have marginal utility of their own, a firm can apply the concept of diminishing marginal ... Read Answer >>
  3. What is the difference between marginal utility and marginal benefit?

    Learn more about the different interpretations, uses, and implications of marginal benefit and marginal utility in economic ... Read Answer >>
  4. What is the concept of utility in microeconomics?

    Read about the concept of utility in microeconomics, and why economists disagree about the usefulness of cardinal utility ... Read Answer >>
  5. What kind of investors buy utility stocks?

    Take a look at why income investors like utilities, why value investors might like utilities and why growth investors tend ... Read Answer >>
  6. How do economists and psychologists calculate diminishing marginal utility differently?

    Find out why disagreements about the validity of the law of diminishing marginal utility usually boil down to arguments about ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center