Economics: The Law of Diminishing Marginal Utility

As we have been discussing, economics is really the study of how people make decisions, based on what they want to get. Economics has many numbers, graphs, and other calculations that depend on numbers, but it only tries to predict how people will act, based on human nature.

The economic law that is probably the most easy to relate with, is the Law of Diminishing Marginal Utility. The Law of Diminishing Marginal Utility says, you will get the most satisfaction from the first unit of something that you have, eat, see, and so forth. For the second unit, you will still have satisfaction, but less than with the first unit. For the third and following units, your satisfaction will become less with each unit.

Of course, it is very confusing if you just look at it that way. Let us look at an example of the Law of Diminishing Marginal Utility. Since we have been using water as our example in the other articles, let us do it for this case.

If you were a football player training in the hot sun for several hours without a break, the first thing you would look for when you came off the field was water. So you get a bottle of water, and take one full swallow. Because you are so thirsty, the first swallow feels the best–it cools your burning throat, makes it easier to breathe, and calms your stress and the pain from the exercise.

With the next swallow, you get a little closer to normal, you are no longer trying to breathe in the water, and you don’t mind drinking a little bit slower. As you continue to drink, your craving and want for the water become less and less, until you are no longer thirsty. If you keep on drinking past that, and force yourself to keep drinking, you will actually want to stop. You no longer have any satisfaction with the drinking.

Diminishing” means “to become gradually less (as in size or importance).” “Marginal” means “measure or degree of difference [between one level and another].” “Utility” means “fitness for some purpose or worth to some end.” In other words, usefulness.

If we put them all together, the Law of Diminishing Marginal Utility says that the usefulness or satisfaction of something will become less (diminish) with every use or consumption (marginally). How does this connect to the rest of economics?

The most important economic law connected to the Law of Diminishing Marginal Utility is the Law of Supply and Demand. Remember, in the Law of Demand, the more people want something, the more expensive it will become. So if you were a water-vendor on the sidewalk, you would be selling cheaper water than a water-vendor at a football game.

The sellers try to find times and places when the marginal utility of their good is at its highest, because then they can sell at high prices. So there are more sellers where there is higher marginal utility. There are less buyers (remember that cheaper goods have more), but they are willing to pay high prices for the good.

To review, the Law of Diminishing Marginal Utility says that the more of something you use, the less you find satisfaction in using it.

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