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What is meant by diminishing marginal utility?

Level:
AS, A-Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 14 Jul 2023

Diminishing marginal utility is an economic concept that states that as a person consumes more units of a specific good or service, the additional satisfaction or utility derived from each additional unit diminishes over time. In other words, the more of a particular item an individual consumes, the less satisfaction or happiness they derive from consuming each additional unit.

Here's a numerical example to illustrate diminishing marginal utility:

Let's consider a person's consumption of chocolate bars. Assume that the person initially has no chocolate bars and then consumes their first chocolate bar. The satisfaction or utility they receive from consuming the first chocolate bar is high, let's say 10 units.

As the person continues to consume more chocolate bars, the additional utility they gain from each additional bar starts to decline. For example, the second chocolate bar may give them 7 units of utility, the third chocolate bar may give them 5 units of utility, and so on.

Here's a hypothetical table illustrating the diminishing marginal utility of chocolate bars:

As shown in the table, the marginal utility decreases as the person consumes more chocolate bars. The first chocolate bar provides the highest marginal utility of 10 units, but with each subsequent bar, the additional utility gained decreases. The fifth chocolate bar only provides a marginal utility of 1 unit.

This example illustrates the concept of diminishing marginal utility, indicating that as consumption increases, the additional satisfaction or utility obtained from each additional unit decreases. It implies that individuals are willing to pay less for each subsequent unit of a good because its marginal utility diminishes.

Diminishing marginal utility has a number of implications for economic behavior. For example, it implies that people will not consume infinite amounts of a good or service, even if it is free. This is because the marginal utility of each additional unit will eventually decline to zero.

Diminishing marginal utility also implies that people will be willing to pay more for the first unit of a good or service than they will for the second unit, and more for the second unit than they will for the third unit, and so on. This is because the marginal utility of each additional unit declines as more of the good or service is consumed.

Diminishing marginal utility is an important concept in economics because it helps us to understand how people make decisions about consumption. It also helps us to understand the way that prices are determined in markets.

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