Picture this. You’ve moved to a new house, and you’re in the process of furnishing it from scratch. You set aside a whole day for utensil and cutlery shopping. Initially, you may be excited about the products you find and add them to your cart without any hesitation. However, after a while, you may be more reluctant to add new products and think twice about whether it’s worth spending on any additional utensils for your kitchen. This phenomenon applies to most products and services, and it’s known as the law of diminishing marginal utility.
The term ‘marginal utility’ here refers to the benefit or satisfaction that you gain from each additional unit of the goods or services you’re buying.
The law of diminishing marginal utility, first introduced by economist Alfred Marshall, explains that as people accumulate more of a product, their desire or need for it decreases. Essentially, the more you consume, the less satisfaction you derive from each additional unit. This law can help consumers and economists understand how increased consumption affects prices and demand. It assumes:
There are many examples of the law of diminishing marginal utility that you will come across in everyday life. Let’s discuss a couple of examples of diminishing marginal utility for products and services.
Say you want to buy new clothes for an upcoming vacation. You purchase a few items initially without much thought about the amount spent. However, once you have enough garments for each day of the vacation, you may be more picky and hesitant to purchase additional clothes. With each new item bought, you may not be as excited or willing to make the purchase.
An employer has recently set up a customer support department and is eager to hire new professionals. For the first 2 or 3 hires, the employer is willing to pay a good package on account of the unmet demand. However, after a point, when the team achieves peak productivity, the employer’s demand for each additional worker thereafter reduces.
There are some exceptions to the law of diminishing marginal utility, such as the following:
Here are some pointers that emphasise the importance of the law of diminishing marginal utility:
You can watch the law of diminishing marginal utility in action in your own spending habits. By monitoring how your spending behaviour changes as you consume more or less of a product or service, you can better understand the examples and exceptions to this fundamental economic law.
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The law of diminishing marginal utility states that the marginal utility of a product or service goes down with each additional unit consumed. As a result, consumers may prioritise products with higher utility and tailor their budgets accordingly to maximise satisfaction.
The law of diminishing marginal utility forces smart consumers to allocate their resources prudently, so that the marginal utility of a product or service continues to add to their overall satisfaction.
If you have not eaten chocolates for a while now, you may be willing to spend Rs. 100 for a bar of chocolate initially. However, once you have consumed it and your cravings are satisfied, you may be willing to spend only around Rs. 50 for the next bar, and even less for the next one.
As the marginal utility of a product or service reduces with rising consumption, consumers are willing to pay less for additional units. This leads to falling demand, which can be countered with reduced prices.
The exceptions to the law of diminishing marginal utility are rare or limited-edition items and products or services associated with hobbies or addictions.