Law of Diminishing Marginal Utility

Law of Diminishing Marginal Utility

In economics, the theory that for each additional unit of a product an individual consumes, the less utility or satisfaction the person derives from it. This is important to determining how much supply of a product the market can handle without diminishing demand. Historically, it has been thought that one can quantify the marginal utility of each unit, but some economists disagree with this. See also: Austrian school.

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Law of Diminishing Marginal Utility

What Does Law of Diminishing Marginal Utility Mean?

A law of economics that states that as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

Investopedia explains Law of Diminishing Marginal Utility

This is the premise on which buffet-style restaurants operate. They entice customers with “all you can eat,” knowing full well that each additional plate of food provides less utility than did the one before it. Despite the hook, most people will eat only until the utility they derive from additional food is slightly lower than the original utility. For example, you go to a buffet, and the first plate of food you eat is very good. On a scale of 10, you would give it a 10. Now your hunger has been tamed somewhat, but you get another full plate of food. Since you are not as hungry, your enjoyment rates at a 7 at best. Most people will stop before their utility drops even more, but say you go back to eat a third full plate of food and your utility drops to 3. If you kept eating, you eventually will reach a point at which eating makes you sick, providing dissatisfaction, or disutility.

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