The law of diminishing marginal utility states that as more and more units of a commodity are consumed, the marginal utility derived from every additional unit must decline. This means that with the consumption of one additional unit of the commodity, the consumer derives lesser satisfaction as compared to the last unit consumed.
Assumptions of DMU
- Ony standard units of the commodity are consumed. For example, a glass of water, a cup of tea or coffee.
- Consumption should be continuous. It means that consumption of the commodity does not take place after a break or sometime later. For example, if you are having a food item, then to comprehend the marginal utility of each unit consumed, the consumption has to be continuous and without time gaps.
Understanding the law of diminishing marginal utility is crucial for economists and businesses when analyzing consumer behavior, setting prices, and predicting how changes in factors like income or prices might affect the quantity demanded of goods and services.