Definition: Diminishing marginal utility is the reduced use or satisfaction that consumers derive from the consumption of each additional unit of a good or a service. This phenomenon occurs because consumers tend to increase consumption of a good or a service while maintaining consumption of other goods or services constant.
What Does Diminishing Marginal Utility Mean?
What is the definition of diminishing marginal utility? The marginal utility of consumption of equal successive units of a commodity will decrease as the consumption increases. The question is: for whom is marginal utility higher with the use of one extra dollar? For a poor man who has only $100 or for a rich man who has $100,000? The law of diminishing marginal utility says that the extra dollar for the rich person will have less value than 1/100,000 and the extra dollar for the poor person will have less value than 1/250.
People seek to equalize their marginal utilities per currency unit. For example, if a person has greater utility / $ in good A than in good B, he will buy more units of good A and less units of good B. The analysis of marginal utility can be used to display the law of demand, which stipulates that the price and quantity demanded are inversely correlated, ceteris paribus.
Let’s look at an example.
Example
Barry goes out with his friends to celebrate his college graduation. He buys beers for everybody, and he has his first beer for $10. After the first round, his best friend John buys beers for everybody for $13. So, Barry has a marginal utility of $3. In the third beer, the marginal utility drops to $1 because Barry starts to feel a bit dizzy. So, upon consuming the second and third beer, Barry’s willingness to go on drinking declines. In the fourth beer, his marginal utility becomes -$2, indicating that Barry does not want to drink anymore. The fifth beer remains untouched.
Summary Definition
Define Diminishing Marginal Utility: DMU means a consumer’s reduced amount of satisfaction from each additional unit of a good or service consumed.
