Law of Diminishing Marginal Utility

The concept was first introduced by German economist Hermann Heinrich Gossen in 1854 and was later refined by economists like William Stanley Jevons, Carl Menger, and Leon Walras during the marginalist revolution. This law describes the psychological tendency of human beings, where the satisfaction level decreases as consumption increases beyond a certain point.

Definition:

According to Alfred Marshall, “The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has.“

The Law of Diminishing Marginal Utility states that:

“As a consumer consumes more and more units of a particular commodity, the utility derived from each successive unit goes on decreasing, other things remaining constant.”

In simpler terms, the more you have of something, the less satisfaction you get from having one more unit. The first unit of any commodity provides maximum satisfaction, and each additional unit provides less satisfaction than the previous one.

Key Terminology

1. Utility: Utility refers to the want satisfying power of a commodity. It is the psychological satisfaction or pleasure that a consumer derives from consuming a good or service. Utility is subjective and varies from individual to individual.

2. Total Utility: Total Utility is the aggregate sum of satisfaction obtained from consuming all units of a commodity. It is calculated by adding the marginal utilities of all the units consumed.

Formula:

$TU=MU_1+MU_2+MU_3+…………+MU_n$

or simply:

$TU_n=\sum_{i=1}^{n} MU_i$

3. Marginal Utility (MU): Marginal Utility is an addition to the total utility when an additional unit of commodity is consumed. It measures the change in total utility when consumption increases by one unity.

Formula:

$MU_n​=TU_n​−TU_{n−1}​$ or it can be written as $MU= \frac{\triangle TU}{\triangle Q}$

Where:

$\triangle TU=$Total Utility

$\triangle Q=$Change in Quantity Consumed

Assumptions of the Law

For the Law of Diminishing Marginal Utility to apply, several key assumptions must be fulfilled:

1. Rational Consumer: The consumer is assumed to behave rationally, aiming to maximize satisfaction by making logical and well-informed consumption choices.

2. Continuous Consumption: The commodity must be consumed in a continuous sequence without long gaps. If significant time passes between consumption, the utility pattern may change.

3. Homogeneous Units: Each unit of the commodity should be identical in all respects—size, quality, and other characteristics. For instance, every glass of water should be of the same size and quality.

4. Standard Units: The quantity consumed should be measured in reasonable and standard-sized units. Extremely small or large units may distort the diminishing utility pattern.

5. Constant Income and Prices: During the consumption process, the consumer’s income and the prices of goods must remain unchanged.

6. Constant Tastes and Preferences: The consumer’s tastes, preferences, habits, and customs should remain stable throughout the consumption period.

7. No Change in External Factors: External conditions such as fashion, weather, season, or the prices of related goods (both substitutes and complements) must remain the same.

8. Cardinal Measurement of Utility: The law assumes that utility can be expressed in numerical terms—a theoretical premise known as the cardinal measurement of utility.

Tabular presentation

Number of Units (Q)	Total Utility (TU) in utils	Marginal Utility (MU) in utils
0	0	—
1	20	20
2	36	16
3	48	12
4	56	8
5	60	4
6	58	-2

1. The first unit gives the highest satisfaction.
   • TU rises from 0 to 20, so MU = 20.
     This makes sense: the person is hungry, so the first unit feels great.
2. Each additional unit adds less extra satisfaction than the previous one.
   • From unit 1 to 2, TU goes from 20 to 36, so MU = 16 (still positive, but smaller).
   • From unit 2 to 3, TU goes from 36 to 48, so MU = 12.
     This pattern continues: 20, 16, 12, 8, 4 — the marginal utility is diminishing.
3. Total utility can still increase even while marginal utility falls.
   • TU keeps rising from 20 to 60 as the person consumes from 1 to 5 units.
     Even though MU is getting smaller, it’s still positive up to the 5th unit, so TU keeps increasing.
4. MU can become zero or negative after a point.
   • At the 6th unit, TU falls from 60 to 58, so MU = -2.
     This means the 6th unit makes the person worse off (too full, discomfort), so total satisfaction actually drops.