In economics, the law of diminishing marginal utility states that the additional benefit of consuming more of a product or service decreases as its consumption increases. That is, the satisfaction or utility they get from the product decreases as they consume more and more of it.

For example, a consumer might buy a particular brand of chocolate for a period. They soon find that their enjoyment of chocolate is waning and will look for an alternative.

Understanding the law of diminishing marginal utility

An individual consumer demonstrates the law of diminishing marginal utility each time he consumes a product. The first unit that is consumed satisfies the consumer’s greatest need. The second unit results in a lower degree of satisfaction, and so on.

Consider an individual on a desert island who finds a case of bottled water. That person might drink the first bottle, indicating that quenching thirst was the most important use of water. The second bottle can be used for bathing and the rest could be kept for later use.

In this scenario, the person indicates a clear priority for water use. This is called ordinal time preference.

It also helps explain why demand curves are downward sloping in microeconomic models because each additional unit of a product or service is put to a less valuable use.

Demands for diminishing marginal utility

The law of diminishing marginal utility is not specific to any industry. Its broad concept relates to different sectors in different ways.

In general, it is statistically proven that consumers exercise more caution and attention when faced with propositions of greater utility. Here are some ways that diminishing marginal utility progresses through a business process.

sale

Sales techniques for each customer are modified according to the consumer’s current marginal utility potential. Consider a salesperson selling you your first cell phone. With your very high marginal utility for any working cell phone, this is an easy sell.

If you already own a mobile phone, the tactics used by the seller will be different. A second phone for work, a backup phone or an upgrade might be suggested.

Although not directly related to the adage “read the camera,” the concept of diminishing marginal utility is very appropriate because not every customer will associate the same utility with a particular product. A phone with the latest bells and whistles might be attractive to many consumers while turning off others.

Production and inventory management

Companies must keep the law of diminishing marginal utility in mind when planning for the future output schedule. They cannot rely entirely on historical production levels because changes in consumer demand will impact the number of units of a product that are needed.

This concept is especially important for shipping companies inventory. The law of diminishing marginal utility can produce a very steep decline.

Again, consider using cell phones. Many people only need one; there is an extremely large jump in utility from owning zero mobile phones to owning one mobile phone. If a market quickly becomes saturated with people all owning cell phones, a company can get stuck in inventory.

Marketing

Marketers want to keep marginal utility high for the products they sell. A product is consumed because it gives satisfaction, but too much of a product could mean that marginal utility goes to zero because consumers have they are sick and tired of a product.

Of course, marginal utility depends on the consumer and the product consumed.

This is an important concept for companies that have a diversity product mix. Imagine your favorite coffee shop. If the store sold only one product, consumers would probably tire of that product; his marginal utility would decrease.

Marketers must juggle a variety of new products to keep consumers interested in numerous products.

Diminishing marginal utility vs. other measurements

The law of diminishing marginal utility should not be confused with other laws of diminishing marginal units. Diminishing marginal utility focuses strictly on consumer experience and the decreasing nature of demand over time. Meanwhile:

Marginal productivity

The law of diminishing marginal productivity states that efficiencies gained through slight process improvements can yield incremental benefits for additional units manufactured.

An example of diminishing marginal productivity is related to the labor costs of manufacturing a car.

It is more immediately profitable to lay off 10% of the production staff and the production line can make do with the remaining resources for the first vehicles. However, after a while, the marginal benefit of production declines due to the lack of staff.

Marginal revenue

The law of diminishing marginal returns states that once maximum efficiency is reached, the amount of profit earned per unit will decrease. This can be due to demand saturation (ie, decreasing marginal utility for consumers) or rising production costs (ie, decreasing marginal product for production).

All these laws are related to the concept of economies of scale.

conclusion

The law of diminishing marginal utility helps explain why consumers are generally less and less satisfied with each additional unit of a product they consume. Marginal utility may differ depending on the consumer and the specific product.