What is the law of diminishing marginal utility?

The Law of Diminishing Marginal Utility states that as you consume more of a good or service, the additional satisfaction you get from each extra unit decreases. Marginal Utility, in this context, is the change in total satisfaction when you consume one more unit of the good or service. In simpler terms, the more you consume, the less additional satisfaction you gain from each additional unit, which is what the Law of Diminishing Marginal Utility describes in economics.

Understanding the law of diminishing marginal utility

The law of diminishing marginal utility is closely tied to the concept of decreasing prices as consumption increases. As people consume more of a product, the satisfaction or value they derive from each additional unit diminishes, leading them to be willing to pay less for each successive unit. For instance, consider an individual who purchases a Premium Smartphone for ₹65,000. The same person may only be willing to pay ₹10000 for a second smartphone because the additional enjoyment they get from it is much lower.

In some cases, the marginal utility can even turn negative, indicating that consuming more of a product becomes undesirable. This illustrates why the first unit of consumption for any product typically provides the highest satisfaction. Subsequent units yield progressively less utility. To navigate this principle, consumers diversify their consumption, enjoying a variety of goods to maintain higher utility levels for each one.

The law of diminishing marginal utility has a direct impact on a company's pricing strategy. The price set for a product must align with the consumer's marginal utility and their willingness to purchase or use the product. In essence, pricing should reflect how consumers perceive the additional satisfaction gained from each unit of the product.

Example of the law of diminishing marginal utility

If you are very hungry, the first bite of a Pizza will be very satisfying. However, as you eat more and more of the Pizza, your hunger will decrease, and each additional bite will be less satisfying. Eventually, you will reach a point where you are no longer hungry, and eating any more of the Pizza will not provide any additional satisfaction.

Limitations of the Law of Diminishing Marginal Utility

While the law of diminishing marginal utility is an important law of economics, it comes with its own share of disadvantages. Given below are the limitations of the law of diminishing marginal utility -

• The law of diminishing marginal utility assumes that the tastes and preferences, fashion, habits, and income of the consumer remain the same. However, this is not true in real-life situations. 

• The income of the consumer is assumed to be constant, which is not true in real life. 

• If the units of the commodity are very small, the law does not work. 

• As per the law of diminishing marginal utility, the products should be similar in quality and size. If the units of the product are not similar in quality and size, the law of diminishing marginal utility fails to operate. 

• The law also fails to operate if the consumption is made after long breaks. 

• The law does not operate for people like drunkards and drug addicts as the satisfaction increases with consumption. 

• Not applicable to money.

• In hobbies such as collecting rare stamps and coins, individuals experience increasing satisfaction with each new addition to their collection. Consequently, the law cannot intervene.