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.

What is the Law of Diminishing Marginal Utility?

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:

• Rational consumer behavior
• Continuous consumption in the economy
• Standardized size for each additional unit

The Law of Diminishing Marginal Utility: Examples and Exceptions

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.

Example 1:

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.

Example 2:

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.

Exceptions to the Law of Diminishing Marginal Utility

There are some exceptions to the law of diminishing marginal utility, such as the following:

• Products or services associated with hobbies like stamp collection, painting or reading
• Addictive substances like alcohol or nicotine
• Rare or limited-edition items like vintage watches or signed book copies

The Importance of the Law of Diminishing Marginal Utility

Here are some pointers that emphasise the importance of the law of diminishing marginal utility:

• Consumers tend to prefer substitutes after reaching a particular level of consumption of a product.
• As consumption rises, the willingness to pay reduces, thus leading to falling demand.
• Sellers and service providers need to counter this by reducing prices to ensure the product remains attractive to the buyer.

To Conclude

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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Frequently Asked Questions

1. What is the law of diminishing marginal utility (DMU), and how does it apply to consumer behaviour?

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.

2. How does the law of diminishing marginal utility influence decision-making in everyday life?

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.

3, Can you explain the concept of diminishing marginal utility using a practical example?

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.

4. In what ways does the law of diminishing marginal utility impact the pricing and demand for goods and services?

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.

5. Is the law of diminishing marginal utility universally applicable, or are there exceptions to this economic principle?

The exceptions to the law of diminishing marginal utility are rare or limited-edition items and products or services associated with hobbies or addictions.