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What is Diminishing Marginal Utility?

The decrease in the usefulness or demand for something as more and more of it is introduced or produced.

The easiest way to conceptualize diminishing marginal utility is by thinking of a factory into which you must put workers who will produce goods. The first group of workers you hire increases the productivity immensely compared to what was being produced before they were hired.

The second group of workers helps a lot also, but not quite as much as the first. Some of the workers have downtime now for a few minutes a day when no work is being done. You hire a third bunch of workers to increase production to get closer to your competitors, and it works, but now some of the workers are supervisors and the new hires don’t have the same drive and sense of ownership in the company.

All other things being equal, the marginal benefit that your production facility received from each additional group hired was decreasing. If you hire another group, it might actually decrease production because they are tripping over one another.

Diminishing marginal utility is also called the law of diminishing returns, and is prevalent in economic theory and production analysis. The same can apply to the utility that a person gets from a giant slice of pizza. At some point as it’s being consumed, it’s still good, but it’s not as good as it was, and it’s not longer necessary to give your body the fuel it needs to get through the day.

Keywords: law of diminishing returns, production analysis,