Law of diminishing marginal utility


The law of diminishing marginal utility is an economic law that states that the consumption of a good provides less additional utility the more it is consumed (keeping the consumption of the other goods constant).

This means that there is a decreasing valuation of a good as a new unit of that good is consumed.

This law is based on the theory of subjective value, a theory that states that the value of a good is established based on the expected utility of each individual.

Marginal income

Example of the law of diminishing marginal utility

Imagine that you are in the desert and you have not drunk water all day. At that moment you find a fountain, how much would you appreciate a glass of water?

Surely a lot. The utility that a glass of water provides you at that time is extremely high because your life depends on it. The next glass would also be very useful, although perhaps a little less. After drinking 5 glasses of water, the sixth glass is of almost no use to you anymore.

If you continued to drink glasses of water, there would come a point where a glass would make you feel bad and you would vomit it, or in other words, it would provide you with negative utility.

That is why we say that marginal utility is decreasing. The utility that a good provides you as more of it is consumed is less the more it is consumed.

Graph of total utility and marginal utility

In the top graph we see the total utility and in the bottom one the marginal utility, which is always decreasing. We can see the graph that shows that as more of a good or goods is consumed, its marginal utility decreases, becoming, in some cases, negative.

More examples of decreasing marginal utility

Suppose a person who does not have shoes to go to work and decides to buy new ones. This person has a positive initial marginal utility. As the shoes wear out, more and more will be bought and your degree of satisfaction will be lower due to the accumulation of more goods. Therefore, the marginal utility will become constant over time and then become decreasing.

Another example can be found in a child when they buy toys, after time, because they will have more toys, they will stop playing with old toys, losing their interest in playing with them. In this case, marginal utility does not refer to a material value and its economic quantification, but rather to consumption capacity and its valuation.

The editor recommends:

Law of diminishing returns

Marginal propensity to consume

Tags:  Colombia derivatives USA 

Interesting Articles