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Law of Diminishing Marginal Utility states that marginal utility from consuming each additional unit of a commodity declines as its consumption increases, while keeping consumption of other commodities constant. Here my doubt is that "keeping consumption of other commodities constant" means what? Here "other commodities" means which are those? Please clarify this with an example.

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You have a beer. The beer is great. You have a second one. It's equally good, but it adds less to your utility (decreasing marginal returns). You have a third beer, which makes you also feel better, but the effect is relatively small. Since you're drinking only for a while, you become hungry and you order a spicy pizza. The pizza makes you thirsty and you have, you name it, another beer. This fourth one is likely to be better than the third one, as it kills the spices.

In this example, the pizza is the 'other commodity'. The term "keeping consumption of other commodities constant" is just a typical economics way of saying "I look at beer consumption in isolation, but I am aware that things are usually more complicated". The law of diminishing marginal utility is just not valid anymore if you consume lots of commodities because of complementarities in consumption.

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  • $\begingroup$ Thanks for your reply. But explaining marginal utility and law of DMU in all texts they take only one commodity. Example: banana. And in your example it's beer. By looking all those explanation in texts there is no mentioned of other commodities. Like you have said pizza. $\endgroup$ – Nandy Dec 11 '18 at 9:39
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    $\begingroup$ Exactly, because the law of DMU is about only one commodity in the first place and might be violated if you take others into account. If the consumption of pizza is constant (e.g. zero), the utility of an additional unit of any identical commodity (beer, bananas, sitting on the beach, watching TV) will be smaller than the previous one. What's unclear from my answer? $\endgroup$ – E. Sommer Dec 11 '18 at 10:09

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