Debitoor's accounting dictionary
Diminishing marginal utility

Diminishing marginal utility - What is diminishing marginal utility?

Diminishing marginal utility is the decrease in satisfaction a consumer has from the consumption of each extra unit of a good or service.

Read our blog on the importance of listening to your customers to see how customer reviews and feedback can help shape your business.

Put simply, with diminishing marginal utility, satisfaction decreases as consumption increases.

Diminishing marginal utility is a law of economics and is an important concept for determining consumer preferences.

Marginal utility is the level of satisfaction from consumption of goods, while the diminishing marginal utility is specifically related to the decrease of satisfaction from the consumption of goods. Marginal utility can be either zero, positive, negative, diminishing, or increasing.

Marginal utility is often referred to as marginal benefit.

Examples of diminishing marginal utility

Let’s say you open a bag of your favourite crisps. When you start eating them, your satisfaction is high. As you continue eating, your satisfaction decreases and decreases until you reach the end of the bag.

In another example, a person may buy a certain type of cereal for a while. Later, they may buy less, or purchase a different type of cereal, as their satisfaction (utility) of that cereal decreases.

After a long run, you get home and are really thirsty. You pour a glass of water and take the first sip which is very refreshing and satisfying. As you continue drinking the water, your satisfaction decreases.

The uses of diminishing marginal utility

There are many benefits of calculating the diminishing marginal utility for your company’s products and services. Understanding this concept can help determine your customers’ mindset and shopping habits, and help you make changes to maximise your profit.

To calculate marginal utility, you take the value or satisfaction level a consumer has for a product and divide it by the amount of additional units taken. The more of a product you have, the less valuable an extra unit is to you.

For instance, if you have a studio apartment, it would be a big deal to move into a 2 room apartment. If you live in a 13 room mansion, then adding a 14th room may not be a big deal to you.

Marketers use diminishing marginal utility as they want to keep the satisfaction high for the goods that they sell. As a customer continues to use a product, the satisfaction of that product decreases. Marketing strategies can communicate new deals, features, or uses for a product which can ultimately keep satisfaction levels high.

Businesses should keep track of their sales, and recurring sales to measure the satisfaction customers have from buying their goods. If sales start dropping for a certain product, you can assume that customers are losing interest in that specific product and act accordingly.

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