Vikash Kumar Prasad

According to the Law of Diminishing Marginal Utility, marginal utility of a good diminishes as an individual consumes more units of a good. In other words, as a consumer takes more units of a good, the extra utility or satisfaction that he derives from an extra unit of the good goes on falling.

It should be carefully noted that is the marginal utility and not the total utility that declines with the increase in the consumption of a good. The law of diminishing marginal utility tells us that the total utility increases but at a decreasing rate.

Breaking Down “Law of Diminishing Marginal Utility”:

Marginal utility  may decrease into negative utility, as it may become entirely unfavourable to consume another unit of any product. Therefore, the first unit of consumption for any product is typically highest, with every unit of consumption the volume of utility comes doqwn. 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 prices for more of the product. For example, assume an individual pays Rs.10000 for a vacuum cleaner. Because he has little value for a second vacuum cleaner, the same individual is willing to pay only Rs. 2000 (say) for a second vacuum cleaner. The law of diminishing marginal utility directly impacts 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 packet of biryani for Rs.200; she is quite hungry and decides to buy five packets of biryani. After doing so, the individual consumes the first packet of biryani and gains a certain positive utility from eating the food. Because the individual was hungry and this is the first unit of the food she consumed, the first packet of biryani brings her a high degree of benefit. Upon consuming the second packet of biryani, the individual’s appetite is getting satisfied. She wasn’t as hungry as before. So the second packet of biryani had a smaller benefit and enjoyment as the first. The third packet of biryani, as before, holds even less utility as the individual is now not hungry anymore.

In fact, the fourth packet of biryani has experienced a diminished marginal utility as well, as it is difficult to consume any further because the individual experiences discomfort upon being full from food. Finally, the fifth packet of biryani cannot even be consumed. The individual is so full from the first four packets that consuming the last packet results in negative utility. The five packets demonstrate the decreasing utility that is experienced upon the consumption of any good. In a business application, an organization may benefit from having three accountants as 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 hiring.

About the Author:

The author is from Guwahati, Assam, India. He is a student of business administration in BIMS, Kolkata, West Bengal, India and is a budding entrepreneur.