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.
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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 the consumption of goods, while the diminishing marginal utility is specifically related to the decrease of satisfaction from the consumption of goods. The marginal utility can be either zero, positive, negative, diminishing, or increasing.
Marginal utility is often referred to as marginal benefit.
As an example, 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. Later, they may buy less, or purchase a different type of cereal, as their satisfaction (utility) with that cereal decreases.
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. However, 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 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.