Before we plunge into the some of the minor complexities of microeconomics, lets have a look at few of the key terms we will be talking about.

• utility – the measure of relative satisfaction gained from a good.

• total utility – the total amount of satisfaction gained from consuming a specific quantity. It is equal to all the marginal utilities added together.

• marginal utility – of a service or good is the utility gained or lost from the increase or decrease in consumption of that service.

• law of diminishing marginal utility – states that there is decline in marginal utility that a person derives from consuming each additional unit of that good.

A friend of mine took me  to an ‘All You Can Eat’ pizza place the other day. The place was good and offered some of the best pizzas in town. We both ordered and were served in no time. After having two slices I was done, but my friend, he kept on asking for more. When he was munching on his 7th slice, he  just gave up half way and complained that he was full and the pizza didn’t taste as good as the first slice. I smiled and went on to explain to him the law of diminishing marginal utility.

According to the law of diminishing marginal utility, the utility i.e. satisfaction derived from consuming successive units of a product will eventually decline as the rate of consumption increases.

So, in my friend’s case, the first slice of pizza that he had, gave him the satisfaction (i.e. utility) of lets say, 10 (an arbitrary number for the sake of understanding). However, his consumption of consecutive slices (increase i.e. marginal) didn’t give him the same amount of satisfaction; the satisfaction that he gained started to decrease with every next slice. The second slice gave him a satisfaction of, 9; the third, 7; fourth 5; and so on till his seventh piece, 1. Had he eaten that slice completely, his utility may had hit 0 and in case he had still asked for the eighth slice and had it, he most probably would have been either very uneasy or would have vomited. In case that would have happened, the utility i.e. satisfaction that he would derive from eating pizza would have turned negative, leaving him dis-satisfied from a thing that he actually loved.

Buffet-style restaurants function on one such principle. . They say ‘all you can eat’ but very well know that you cannot eat all; unless you give into the temptations and overindulge.

Also, this law explains why we don’t spend all our earnings or budget on just one or few of the products that we like. As we increase our consumption of any good, the utility we derive from it goes on decreasing with every additional consumption till it eventually becomes less than the cost of that good. If that happens, we wont feel like buying that product anymore.