Economics

Topic updates

Pricing for diminishing marginal utility!

Geoff Riley

23rd October 2017

What a fantastic image to use when discussing marginal utility and the demand curve!

The Law of Diminishing Marginal Utility

Marginal utility is the change in satisfaction from consuming an extra unit of a good or service
Beyond a certain point, marginal utility may start to fall (diminish)
If marginal utility is falling, then consumers may only be prepared to pay a lower price!
This helps to explain downward sloping demand curve for a good or service

Maximising Utility

With a single product, total utility is maximised when marginal utility is zero
When multiple products are being chosen, the condition for maximising utility is that a consumer equalizes the marginal utility per pound spent
The condition for maximising utility is:
MUA/PA = MUB/PB
Where: MU is marginal utility and P is price

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

@tutor2uGeoff