Law of Diminishing Marginal Utility

What Is the Law of Diminishing Marginal Utility?

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 the incremental increase in utility that results from the consumption of one additional unit. "Utility" is an economic term used to represent satisfaction or happiness.

Key Takeaways

  • The law of diminishing marginal utility says that the marginal utility from each additional unit declines as consumption increases.
  • The marginal utility can decline into negative utility, as it may become entirely unfavorable to consume another unit of any product.
  • The marginal utility may decrease into negative utility, as it may become entirely unfavorable to consume another unit of any product.

Understanding the Law of Diminishing Marginal Utility

The marginal utility may decrease into negative utility, as it may become entirely unfavorable to consume another unit of any product. Therefore, the first unit of consumption for any product is typically highest, with every unit of consumption to follow holding less and less utility. Consumers handle the law of diminishing marginal utility by consuming numerous quantities of numerous goods.

The law of diminishing marginal utility directly relates to the concept of diminishing prices. As the utility of a product decreases as its consumption increases, consumers are willing to pay smaller dollar amounts for more of the product. For example, assume an individual pays $100 for a vacuum cleaner. Because he has little value for a second vacuum cleaner, the same individual is willing to pay only $20 for a second vacuum cleaner.

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 utilize the good.

Example of Diminishing Utility

An individual can purchase a slice of pizza for $2, and is quite hungry, so they decide to buy five slices of pizza. After doing so, the individual consumes the first slice of pizza and gains a certain positive utility from eating the food. Because the individual was hungry and this is the first food consumed, the first slice of pizza has a high benefit.

Upon consuming the second slice of pizza, the individual’s appetite is becoming satisfied. They are not as hungry as before, so the second slice of pizza had a smaller benefit and enjoyment than the first. The third slice, as before, holds even less utility as the individual is now not hungry anymore.

The fourth slice of pizza has experienced a diminished marginal utility as well, as it is difficult to be consumed because the individual experiences discomfort upon being full from food. Finally, the fifth slice of pizza cannot even be consumed. The individual is so full from the first four slices that consuming the last slice of pizza results in negative utility.

The five slices of pizza demonstrate the decreasing utility that is experienced upon the consumption of any good. In a business application, a company may benefit from having three accountants on its staff. However, if there is no need for another accountant, hiring another accountant results in a diminished utility, as there is a minimum benefit gained from the new hire.

What Is an Example of Diminishing Marginal Utility?

Diminishing marginal utility is the decline of enjoyment from consuming or buying one additional good. For example, a consumer buys a bag of chocolate and after one or two pieces their utility rises, but after a few pieces, their utility will start to decline with each additional piece that's consumed—and eventually, after enough pieces, will likely result in negative equity.

What Is Marginal Utility With an Example?

Marginal utility is the enjoyment a consumer gets from each additional unit of consumption. It calculates the utility beyond the first product consumed. If you buy a bottle of water and then a second one, the utility gained from the second bottle of water is the marginal utility.

What Is a Utility Example?

The utility is the degree of satisfaction or pleasure a consumer gets from an economic act. For example, a consumer can purchase a sandwich so they are no longer hungry, thus the sandwich provides some utility.

Article Sources
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  1. Corporate Finance Institute. "What Is the Law of Diminishing Marginal Utility?" Accessed Feb. 1, 2022.

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