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Fundamentals of Business Economics and Management · Utility, Wealth, Production

Law of Diminishing Marginal Utility Explained with Examples

Updated 10 October 2026 · Fact-checked

The law of diminishing marginal utility says that as you consume more units of a good, the extra satisfaction from each additional unit falls, other things remaining the same. To solve questions, find MU as the change in total utility (MUₙ = TUₙ − TUₙ₋₁), then check where MU falls, reaches zero or turns negative.

Understand Law of Diminishing Marginal Utility

Utility is the satisfaction you get from consuming a good. Total utility (TU) is the satisfaction from all units consumed. Marginal utility (MU) is the extra satisfaction from one more unit.

The law of diminishing marginal utility says: as you consume more and more units of a good, the marginal utility from each extra unit goes on falling, provided the consumption is continuous and other conditions stay the same. Think of eating samosas when you are hungry. The first one is great. The second is good. By the fifth, you hardly want it.

While MU is positive, TU keeps rising, but at a slower rate. When MU becomes zero, TU is at its maximum. This is the point of satiety. If you still consume further, MU becomes negative and TU falls.

Assumptions of the law:
- Utility is measurable in numbers (cardinal measurement).
- The units are of the same size and quality.
- Consumption is continuous, without long gaps.
- Tastes, habits and income of the consumer do not change.
- The marginal utility of money stays constant.
- The consumer is rational.

Exceptions are cases where the law seems not to hold. Commonly listed ones are: a hobby such as collecting stamps or coins, where more units raise the desire for more; a miser's love of money; rare articles; and in some cases music or poetry heard repeatedly, which may be liked more on repetition. These are only apparent exceptions, because the assumptions of the law are not met.

Importance: the law explains why the demand curve slopes downward. A consumer pays less for each extra unit because it gives less satisfaction. It also underlies the law of equi-marginal utility, which explains why you spread spending across many goods.

Note that the demand-curve derivation and the law of equi-marginal utility both rely on the assumption that the marginal utility of money stays constant. This assumption applies to the analysis of the demand for a single good, where the money spent on it is a small part of income. The related idea that the marginal utility of money or income falls as income rises is used to justify progressive taxation. That argument relaxes the constant-MU-of-money assumption, so do not mix the two uses.

Key formulas to remember

Marginal utility from total utility
MUₙ = TUₙ − TUₙ₋₁
Use when a table of TU is given. For the first unit, MU = TU.
Marginal utility for a large change
MU = ΔTU ÷ ΔQ
Use when quantity changes by more than one unit.
Total utility from marginal utility
TUₙ = MU₁ + MU₂ + … + MUₙ = ΣMU
Add MU values to rebuild TU.
Satiety point
MU = 0 ⇒ TU is maximum
After this point MU is negative and TU falls.
Law in short
Quantity ↑ ⇒ MU ↓ (other things constant)
MU falls first; TU rises at a decreasing rate while MU > 0.

How to solve Law of Diminishing Marginal Utility questions

Use this method for table, graph or theory questions on the law.

  1. 1Read what is given: TU values or MU values, and what is asked.
  2. 2If TU is given, compute MU for each unit as TUₙ − TUₙ₋₁. The first MU equals the first TU.
  3. 3If MU is given, add the values one by one to get TU.
  4. 4Look at the sign of MU. Positive means TU is rising. Zero means TU is at its maximum. Negative means TU is falling.
  5. 5Identify the unit at which MU first falls, or the unit where MU is zero (satiety).
  6. 6For theory questions, state the law, then assumptions, then exceptions, matching the option wording.
  7. 7Check the answer against the table: MU should be falling throughout for the law to hold.

Quickest way: Subtract down the TU column

When to use it: Use for any MCQ giving TU values and asking for MU, the satiety point or the TU after some units.

  1. Write the TU values in a row on your rough sheet.
  2. Subtract each value from the next. These are the MU values.
  3. Spot the unit where the difference is 0. TU is highest there.
  4. If MU is asked at the nth unit, subtract only the two needed TU values.
  5. Eliminate options that show MU rising or TU falling while MU is positive.

Common mistakes in Law of Diminishing Marginal Utility

  • Treating TU as falling when MU falls

    Students mix up the fall in the rate of increase with a fall in the level.

    Fix: TU keeps rising as long as MU is positive. It falls only when MU is negative.

  • Calculating MU as TU ÷ units

    Confusion with average utility.

    Fix: MU is the change in TU for one more unit. TU ÷ units is average utility.

  • Thinking TU is maximum when MU is negative

    Students remember the word 'maximum' but not the exact point.

    Fix: TU is maximum exactly where MU = 0.

  • Forgetting that MU for the first unit equals TU

    There is no earlier TU to subtract.

    Fix: Take TU₀ = 0, so MU₁ = TU₁.

  • Calling every apparent exception a true exception

    Students memorise the list without noting the assumptions.

    Fix: Remember that exceptions like hobbies or money for a miser arise because the assumptions (normal consumer, same units, continuous use) are not met.

Worked examples

Example 1

A consumer's total utility from oranges is: 1 orange = 20, 2 = 36, 3 = 48, 4 = 56, 5 = 60, 6 = 60. Find the marginal utility of the 4th orange and the satiety point.

Show the solution
  1. MU₁ = 20 − 0 = 20.
  2. MU₂ = 36 − 20 = 16.
  3. MU₃ = 48 − 36 = 12.
  4. MU₄ = 56 − 48 = 8.
  5. MU₅ = 60 − 56 = 4.
  6. MU₆ = 60 − 60 = 0.
  7. MU falls steadily, so the law holds. MU is zero at the 6th orange.

Answer: MU of the 4th orange is 8 utils. The satiety point is at the 6th orange, where MU = 0 and TU is maximum at 60.

Example 2

The marginal utilities of successive cups of tea for Ravi are 10, 7, 4, 1 and −2 utils. What is his total utility after 4 cups, and what happens if he drinks the 5th cup?

Show the solution
  1. TU after 4 cups = 10 + 7 + 4 + 1 = 22.
  2. MU of the 5th cup = −2, which is negative.
  3. TU after 5 cups = 22 + (−2) = 20.
  4. So TU falls from 22 to 20.

Answer: TU after 4 cups is 22 utils. Drinking the 5th cup lowers TU to 20 because its MU is negative.

Exam tips

  • Most questions give a small TU or MU table. Practise subtracting quickly and accurately.
  • Know the link: MU positive means TU rising, MU zero means TU maximum, MU negative means TU falling.
  • For assumption and exception questions, learn the standard lists and pick the option that matches them.
  • Remember that the law explains the downward slope of the demand curve. This link is often tested.
  • There is no negative marking, so attempt every question and eliminate options that break the TU–MU link.

Practice questions from Utility, Wealth, Production

Law of Diminishing Marginal Utility in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Law of Diminishing Marginal Utility: frequently asked questions

What is the law of diminishing marginal utility in simple words?

It says that each extra unit of a good you consume gives you less extra satisfaction than the previous unit, if other things stay the same. The first unit is valued most and later units less.

How do you calculate marginal utility from total utility?

Subtract the earlier total utility from the later one: MUₙ = TUₙ − TUₙ₋₁. The first unit's MU equals its TU. For bigger changes in quantity, divide the change in TU by the change in quantity.

What are the main assumptions of the law?

Utility can be measured, units are identical, consumption is continuous, tastes and income stay constant, and the marginal utility of money is constant. The consumer is also assumed to be rational.

What are the exceptions to the law?

Commonly cited exceptions include hobbies like collecting stamps or coins, a miser's desire for money, and rare items. These are often called apparent exceptions because they occur when the usual assumptions do not hold.