The law of diminishing marginal utility states that all else equal, as consumption increases, the marginal utility derived from each additional unit declines.
In simple terms, it means that the more of an item that you use or consume, the less satisfaction you get from each additional unit consumed or used. The change in utility gained from utilizing an additional unit of a product is known as marginal utility.
Understanding the Law of Diminishing Marginal Utility
According to many economists like Dr Marshall, the law of diminishing marginal utility definition is when the additional benefit that a person derives from a given increase of his stock of anything diminishes with the increase in the stock that he already has. The law states that the more we have of a commodity, the less we want to have more of it as the utility derived from every success unit of the commodity keeps on declining when more is consumed.
Vinay, for example, is starving and hasn’t consumed anything for a while. When he eventually starts to consume, the very first piece will provide him with a considerable measure of satisfaction. As he continues to eat even more meals, his hunger will wane to the extent that he no longer wants to eat.
Applying the law in business
Businesses can use this principle to structure their workforce. For example, a company may benefit from having three accountants on its staff. If there is no need for another accountant, though, hiring another accountant results in a diminished utility, as there is a minimum benefit gained from the new hire. However, if you have two accountants but no one to process paperwork, hiring a new administrative assistant has a higher level of utility than hiring a third accountant.
Limitations of the Law:
There are exceptions to the law of diminishing marginal utility.
Very small or dissimilar units
If the units of commodities are very small then the law does not operate. The unit should be similar in size, quality etc. The law of diminishing marginal utility will not operate if the units that are consumed are not similar in size and quality. The law will also not operate if the units are consumed after long breaks.
Mentally unstable people / Rare collections
People like drunkards or drug addicts will get greater satisfaction with every successive dose of liquor. Hence, the law fails to operate in these cases.
When people collect rare coins and stamps for example, in such cases the person’s satisfaction increases with every addition to his stock or collection. The law hence cannot operate.
Not applicable to money
Money is a commodity which is appreciated greatly by rich and poor. There is a saying that the more money a person has the more he wants of it, hence, the law cannot operate in the case of money.
However, the law of diminishing marginal utility helps explain why consumers are generally less and less satisfied with each additional product.
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