A Business Encyclopedia

Law of Diminishing Marginal Utility

Definition: The law of Diminishing Marginal Utility posits that with the more and more consumption of the units of the commodity the utility derived from each successive unit goes on diminishing, provided the consumption of other commodities remain constant.

The concept of the law of diminishing marginal utility can be understood through a real life example. Suppose you are thirsty, and as you drink the first glass of water, keeping the consumption of all other commodities constant, you get the maximum satisfaction, and with each successive glass of water, the additional benefit (utility) diminishes.

The law of diminishing marginal utility can be illustrated through the table given below. Suppose there is a commodity X, whose utility can be measured in the quantitative terms. Also, the total utility and marginal utility of the commodity is given in the table.

Units of Commodity XTotal Utility (Tux)Marginal Utility (MUx)

Law of Diminishing Marginal Utility-final

As shown in the table., with the increase in the consumption of the units of commodity X, the total utility increases, but at a diminishing rate. The marginal utility also diminishes with the consumption of each successive unit of X.

As shown in the fig. TUx increases as a result of the consumption of additional units of the commodity X while the MUx is a downward sloping curve, which shows that the utility diminishes with the consumption of more and more units of the commodity X. At units 4, the TUx reaches to the maximum point, the Point of Saturation denoted as M, from where the TUx starts declining. Beyond this point, i.e. as the TUx starts declining the MUx becomes negative. The downward sloping Marginal utility curve illustrates the law of diminishing marginal utility.

The relationship between the Total Utility and Marginal Utility can be summarized as:

  • When MU decreases, TU increases at a decreasing rate.
  • When MU is Zero, TU is maximum.
  • When MU is negative, TU starts declining.

Thus, the law of diminishing marginal utility holds universally, for both the durable and non-durable goods. In certain conditions, such as accumulation of money, a hobby of collecting old coins, stamps, visiting cards, etc. the marginal utility might initially increase, but eventually, it starts declining.

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