In economics, the law of diminishing marginal utility is one of the most important concepts to understand. Suppose you have bought a mobile phone; you’d get a certain level of satisfaction. Now let’s say, you have bought another phone along with it. You’d naturally pay far less than the first one. Moreover, you’d pay far less than the third one. So, you are paying less than the previous one and getting less utility along with it as well. Therefore, this is what the concept is all about. In this article, we will discuss the law of diminishing marginal utility and how you can use it in a practical world.
Table of Contents
An Overview on Diminishing Marginal Utility
According to the law, if the consumption of a certain product increases the marginal utility derived from each of the units will decile. Moreover, the marginal utility is the changes of a certain unit of utility. It is an additional unit that has been consumed by the consumer. So, do you want to know what a Utility is?
Well, in simple terms, utility is the term that we use to represent the satisfaction or happiness of a person. Therefore, we have a theory that this concept is an abstract one and it also varies from person to person. Therefore, a marginal utility is an incremental increase in the utility which is a result of the consumption of one additional unit.
Knowing the Law of Marginal Utility with An Example
As per the law, a marginal utility can decrease into a negative utility. In other words, it can be difficult to consume as time goes by. Therefore, the consumption of the first unit is always the highest as per the law. Thereafter, every unit of it will be less satisfactory than the previous unit. Therefore, we draw the slope of the utility in the graph downwards.
One of the best examples we can give to make you understand it better is, none other than pizza. So, the first slice you eat will provide you with immense joy. Moreover, the second one too will be really good. However, with each bite of the slice, your appetite will get fulfilled. So, the last slice won’t be as satisfactory as the first one.
Practical Use in A Business
You can apply this theory to your business as it’s also connected to the law of demand. The law suggests that if the price decreases, consumption will increase and vice versa. Therefore, we can say that, when a product becomes plentiful, the value per unit will decrease, similar to the marginal unity concept.
So, if you are a business person and want the best, you should focus on increasing the value of marginal utility. Moreover, it will also depend on your understanding of consumer behavior and choices.
So, this was brief on the Law of Diminishing Marginal Utility. Knowing these theories, you can apply them to practical use and make the best out of your business.