Law of Diminishing Marginal Utility
Class 11 Micro Economics — Gossen's First Law and how each additional unit gives less satisfaction
1. Statement of the Law
This law explains why people spread their incomes over different goods instead of buying only one. You might love pizza, but you would not order five identical pizzas for dinner — because the satisfaction from each additional slice keeps falling. This is the fundamental reason variety exists in consumption.
Also Known As
First given by German Economist H.H. Gossen (1854) · Also called Gossen's First Law of Consumption
Known as the Fundamental Law of Satisfaction · Referred to as the Fundamental Psychological Law
Marginal Utility
Birthday Pizza Story
1st Slice
MU: Very High
Satisfaction
High
Key Takeaways
- DMU is a universal experience — the more you have of something, the less you want an additional unit.
- It is the basis of the Law of Demand (why demand curves slope downward).
- It helps explain consumer equilibrium — when MU equals price, consumers stop buying.
- The law holds only when consumption is continuous and all other factors remain constant.
2. Ten Assumptions of Law of DMU
Like all economic laws, the Law of DMU is based on certain assumptions. These define the conditions under which the law operates. If any assumption breaks, the law may not hold.
Exam Tip
The starred assumption — MU of money remains constant (Assumption #8) — is frequently asked in CBSE board exams. Remember: in reality, as a consumer spends, remaining money becomes dearer. But for simplicity, economists ignore this increase.
3. Diagrammatic Explanation
The following MU schedule and diagram show exactly how marginal utility falls with each additional pizza slice, becomes zero at the point of satiety, and turns negative beyond it.
| Pizza Slices | Total Utility (utils) | Marginal Utility (utils) |
|---|---|---|
| 1st | 20 | 20 |
| 2nd | 36 | 16 |
| 3rd | 46 | 10 |
| 4th | 50 | 4 |
| 5th (Point of Satiety) | 50 | 0 |
| 6th | 44 | -6 |
MU Curve Diagram
Hover or click bars to explore
Key Takeaways
- Point A to D: MU is positive but falling — TU increases at a diminishing rate.
- Point E: MU = 0 — TU reaches its maximum. This is the Point of Satiety.
- Point F: MU becomes negative — TU starts falling. This is disutility.
- The MU curve slopes downward from left to right, reflecting the law.
4. Explore More
MU may increase initially
Sometimes the first unit of consumption is not the most satisfying. For example, in a video game, the first 10 minutes might be tutorials (low utility), while the next 10 minutes of actual gameplay give much higher satisfaction. MU may initially increase before it starts diminishing.
No indication about rate of fall
The Law of DMU only states that MU falls — it says nothing about how fast it declines. For some goods (like water), MU may fall slowly. For others (like ice cream), it may drop sharply after the first few units. The rate of decline depends on the nature of the commodity and the consumer.
Importance of the Law
The entire utility approach to Consumer's Equilibrium is based on the Law of DMU. Without this law, we cannot explain why a rational consumer stops consuming at the point where MU = Price. It also forms the foundation of the Law of Demand, the concept of consumer surplus, and the principle of progressive taxation.