Loading the player...

What is the 'Law Of Diminishing Marginal Utility'

The law of diminishing marginal utility is a law of economics 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. Marginal utility is derived as the change in utility as an additional unit is consumed.

BREAKING DOWN 'Law Of Diminishing Marginal Utility'

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.

Diminishing Prices

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 Marginal Utility

An individual can purchase a slice of pizza for $2; she is quite hungry and decides 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 she consumed, the first slice of pizza has a high benefit. Upon consuming the second slice of pizza, the individual’s appetite is becoming satisfied. She wasn't as hungry as before, so the second slice of pizza had a smaller benefit and enjoyment as the first. The third slice, as before, holds even less utility as the individual is now not hungry anymore.

In fact, 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 a fourth accountant results in a diminished utility, as little benefit is gained from the new hire.

  1. Total Utility

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

    The additional satisfaction or utility that a person receives ...
  3. Utility Revenue Bond

    A type of municipal bond that is issued to finance utility projects, ...
  4. Marginalism

    Marginalism covers the study of marginal theories and relationships ...
  5. Intertemporal Choice

    An economic term describing how an individual's current decisions ...
  6. Dow Jones Utility Average - DJUA

    The Dow Jones Utility Average is a price-weighted average of ...
Related Articles
  1. Insights

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  2. Investing

    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.
  3. Investing

    Can Pizza Deliver You Good Returns ?

    Americans love pizza regardless of economic conditions. Should you consider the following pizza stocks?
  4. Investing

    Yum! Brands' Pizza Hut Heats Up the Delivery Wars

    When it comes to quick-serve pizza, Yum! Brands (NYSE: YUM) Pizza Hut has long lagged behind Domino's (NYSE: DPZ) and Papa John's (NASDAQ: PZZA). That's partly because Pizza Hut has lacked a ...
  5. Investing

    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.
  6. Investing

    How Utilities ETFs Deal With Rising Rates

    Utilities stocks and ETFs may be vulnerable to rising interest rates, but there are other factors to consider.
  7. Investing

    Why Pizza Hut Is Making a Big Tech Upgrade

    In the quick-serve pizza space Yum! Brands (NYSE: YUM) Pizza Hut long has trailed fast-growing Domino's (NYSE: DPZ). That has partly been because the Yum! chain has lagged its rival on the technology ...
  8. Investing

    Top 4 Utilities Mutual Funds

    Discover which mutual funds in the utilities industry are top rated, and learn how investors can include utilities as part of an asset allocation strategy.
  1. 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 >>
  2. What does the law of diminishing marginal utility explain?

    Learn about some of the important economic insights that can be derived from applications of the law of diminishing marginal ... Read Answer >>
  3. What are the top investing strategies for investing in the utility sector?

    Employ the right strategies when investing in the utility sector, and you can see consistent returns with less risk than ... Read Answer >>
  4. What is the marginal utility of income?

    Take a deeper look at marginal utility of income, why individuals tend to be more satisfied with more income and how measuring ... Read Answer >>
  5. What is a utility stock?

    Investing in difficult economic conditions requires knowledge of different stock classes. Utility stocks are one vehicle ... Read Answer >>
  6. What is the difference between marginal utility and marginal value?

    Find out what marginal utility and marginal value mean in economics and why these terms sometimes overlap to describe the ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  6. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
Trading Center