Law of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility (LDMU), also known as Gossen's First Law after the German economist Hermann Heinrich Gossen who first stated it, is one of the most fundamental laws of consumption. It states that as a consumer goes on consuming successive units of a commodity, the marginal utility derived from each additional unit goes on diminishing, other things — income, prices, tastes — remaining unchanged.

The underlying intuition is simple: a want becomes progressively less intense as it is satisfied. The first roti eaten by a hungry person yields very high satisfaction; each subsequent roti satisfies a want that is already partly met, so it adds less and less extra satisfaction, until a point is reached — the point of satiety — beyond which further units may add nothing, or even cause discomfort (negative marginal utility), as in the buttermilk example above.

Assumptions of the law:

• The consumer is rational and aims to maximise satisfaction.
• Utility can be cardinally measured in utils.
• The units of the commodity consumed are identical/homogeneous in size, quality and time.
• Consumption is continuous, with no unusual time gap between units.
• The consumer's income, tastes and the prices of related goods remain unchanged during the period of analysis.
• The marginal utility of money itself remains constant.

Exceptions: the law may not hold for a miser's accumulation of money, for collectors' items such as rare coins or stamps (where MU may rise with the size of the collection), or for the first few units of an addictive good; these are treated as exceptions rather than contradictions of the general rule, because they typically violate one of the assumptions above (for example, homogeneity or a constant marginal utility of money). …