Alfred Marshall, a British economist, observed that as you accumulate more of something, your desire for it decreases. As consumption increases, the marginal utility derived from each additional unit declines.
To understand the law, break it into components
- Utility is the degree of satisfaction or pleasure a consumer gets from an economic act.
- Marginal Utility is the enjoyment a consumer gets from each additional unit of consumption. It calculates the utility beyond the first product consumed.
The law assists in determining the optimal quantity of a good or service that a consumer is willing to purchase
The Law of Diminishing Marginal Utility predicts how consumers will react to a certain level of supply. As they consume more, the utility of each unit will decrease until the consumer doesn’t want anymore. At a point consumers are more likely to stop or seek an alternative.
The marginal utility may decrease into negative utility
Negative marginal utility is the point after which consumption of any additional commodity gives negative utility, which means the consumer is worse off. – also known as overconsumption.
Subjective value changes most dynamically near the zero point, and quickly levels off as gains (or losses) accumulate
Because the first quantity of something has the most utility, consumers are usually willing to pay more for it. People quickly adjust to affective experiences and the value consumers ascribe to a good reduces the more they consume. This trend is reflected in the concave shape of most utility functions.
The more of an item that a consumer uses, the less satisfaction they get from each additional unit. The value (or price) of a marginal unit reduces, and knowing this, a producer can use the law to determine the optimal amount of supply to produce a good.