Law of Diminishing Marginal Utility

Definition

The law of diminishing marginal utility states that as a person consumes more of a good, the marginal utility (the additional satisfaction or value) derived from each additional unit of that good decreases. This principle is central to understanding consumer behavior and consumption choices.

5 Must Know Facts For Your Next Test

1. The law of diminishing marginal utility explains why consumers typically consume a variety of goods rather than focusing on just one good.
2. The law of diminishing marginal utility is a fundamental concept in microeconomics and is used to explain consumer demand and the shape of the demand curve.
3. Diminishing marginal utility is the reason why consumers are willing to pay less for each additional unit of a good as they consume more of it.
4. The law of diminishing marginal utility applies to both durable and non-durable goods, as well as to services.
5. Diminishing marginal utility is a key assumption in the theory of consumer choice and is used to derive the downward-sloping demand curve.

Review Questions

• Explain how the law of diminishing marginal utility relates to consumer behavior and consumption choices.
  • The law of diminishing marginal utility states that as a consumer consumes more of a good, the additional satisfaction or value they derive from each additional unit decreases. This principle helps explain why consumers typically consume a variety of goods rather than focusing on just one good. As a consumer's consumption of a good increases, the marginal utility they derive from each additional unit decreases, leading them to allocate their limited resources across different goods to maximize their overall satisfaction.
• Describe how the law of diminishing marginal utility is used to derive the downward-sloping demand curve.
  • The law of diminishing marginal utility is a key assumption in the theory of consumer choice, which is used to derive the downward-sloping demand curve. As the price of a good decreases, the quantity demanded increases because the marginal utility of each additional unit of the good is higher, leading consumers to be willing to pay more for those units. Conversely, as the price of a good increases, the quantity demanded decreases because the marginal utility of each additional unit is lower, making consumers less willing to pay for those units.
• Analyze how the law of diminishing marginal utility affects a consumer's decision to allocate their limited resources across different goods.
  • The law of diminishing marginal utility plays a crucial role in a consumer's decision to allocate their limited resources across different goods. As a consumer consumes more of a particular good, the marginal utility they derive from each additional unit decreases. This leads the consumer to seek out other goods that can provide them with higher marginal utility, in order to maximize their overall satisfaction. Consumers will continue to allocate their resources across different goods until the marginal utility of the last dollar spent on each good is equal, thereby achieving the optimal consumption bundle that maximizes their utility given their budget constraint.

Related terms

Marginal Utility:

Marginal utility is the additional satisfaction or value a consumer derives from consuming one more unit of a good or service.

Utility:

Utility refers to the satisfaction or value a consumer derives from consuming a good or service.

Diminishing Returns: Diminishing returns is the principle that as more of a variable input (such as labor) is added to a fixed input (such as capital), the marginal output will eventually decrease.