Marginal Utility - Diminishing Marginal Utility

Diminishing Marginal Utility

The notion that marginal utilities diminish across the ranges relevant to decision-making is called the "law of diminishing marginal utility" (and is also known as Gossen's First Law). This refers to the utility which one obtains with the increase in the stock that one already had. "The law of diminishing marginal utility is at the heart of the explanation of numerous economic phenomena, including time preference and the value of goods... The law says, first, that the marginal utility of each homogenous unit decreases as the supply of units increases (and vice versa); second, that the marginal utility of a larger-sized unit is greater than the marginal utility of a smaller-sized unit (and vice versa). The first law denotes the law of diminishing marginal utility, the second law the law of increasing total utility."

That the utility of a total amount of stock may reach a tipping point (where a new or absolute use occurs) does not imply that marginal utility will continue to increase indefinitely thereafter: For example, beyond some point, further doses of antibiotics would kill no pathogens at all, and might even become harmful to the body. Enough calories sustains a population, yet beyond a point, more calories cannot be consumed and are simply discarded. A market may absorb a number of widgets, but each additional widget added to the market is of less value.

Simply put, as the rate of commodity acquisition increases, marginal utility decreases. If commodity consumption continues to rise, marginal utility at some point falls to zero, reaching maximum total utility. Further increase in consumption of units of commodities causes marginal utility to become negative; this signifies dissatisfaction. The diminishing of marginal utility should not necessarily be taken to be itself an arithmetic subtraction; it may be no more than a purely ordinal change.