Definition
The Law of Diminishing Marginal Utility is a fundamental principle in economics that states that as a person consumes more units of a good or service, the additional satisfaction (utility) obtained from consuming each additional unit decreases. In other words, the first unit of consumption of a good or service brings more satisfaction than the next unit, and satisfaction keeps decreasing with each additional unit consumed, assuming that all units are consumed sequentially and no other factors affecting utility are changed.
This concept helps explain consumer behavior, demand curves, and the pricing strategies of businesses. The law highlights that while total utility may continue to rise as consumption increases, the rate at which satisfaction is gained (marginal utility) diminishes.
Examples
Example 1: Eating Slices of Pizza
Imagine a person who is extremely hungry and starts eating slices of pizza. The first slice brings immense satisfaction and utility. However, as they consume their second, third, and fourth slices, the satisfaction gained from each additional slice decreases until the point where consuming another slice may bring no satisfaction at all, or may even become dissatisfying if the person feels overly full.
Example 2: Drinking Bottles of Water
Consider a thirsty person who drinks bottles of water. The first bottle provides significant relief and high satisfaction. The second bottle, while still providing satisfaction, does so to a lesser extent. By the third or fourth bottle, the additional satisfaction may be minimal because the person is already quenched and more water is not as needed.
Frequently Asked Questions (FAQs)
What is meant by marginal utility?
Marginal utility refers to the added satisfaction or benefit a consumer gets from consuming one additional unit of a good or service.
How does diminishing marginal utility influence consumer choices?
Consumers will allocate their resources to purchase a variety of goods such that the marginal utility they derive from the last unit of currency spent on each good is equalized, thereby maximizing their total utility under their budget constraints.
Is it possible for marginal utility to ever increase?
Under normal circumstances, marginal utility tends to decrease. However, if a consumer becomes more accustomed to a good or finds a new use for it, there could be scenarios where marginal utility may briefly increase, although this is not common.
Why is diminishing marginal utility important in economics?
It is crucial for understanding consumer choices, shaping demand curves, pricing strategies, and economic welfare. It explains why consumers diversify their consumption and do not spend all their resources on a single type of good or service.
Total Utility
Total Utility refers to the overall satisfaction or benefit that a consumer receives from consuming a certain quantity of goods or services.
Marginal Cost
Marginal Cost is the additional cost incurred in the production of one more unit of a good or service.
Law of Demand
Law of Demand posits that, all else being equal, an increase in the price of a good or service will lead to a decrease in quantity demanded, and vice versa.
Online References
Suggested Books
- “Principles of Economics” by N. Gregory Mankiw
- “Microeconomics” by Robert Pindyck and Daniel Rubinfeld
- “Economics in One Lesson” by Henry Hazlitt
Fundamentals of Diminishing Marginal Utility: Economics Basics Quiz
### What does the Law of Diminishing Marginal Utility state?
- [x] Each additional unit of a good or service provides less satisfaction to a consumer.
- [ ] Each additional unit of a good or service provides more satisfaction to a consumer.
- [ ] Total utility always decreases with more consumption.
- [ ] Marginal cost decreases with more consumption.
> **Explanation:** The Law of Diminishing Marginal Utility states that each additional unit of a good or service provides less satisfaction to the consumer.
### Which of the following best highlights diminishing marginal utility when eating pizza?
- [x] The first slice is highly satisfying, but the satisfaction decreases with each additional slice.
- [ ] Your satisfaction remains constant with every slice.
- [ ] The second slice is always more satisfying than the first.
- [ ] Your satisfaction increases dramatically with each slice.
> **Explanation:** Consuming the first slice brings high satisfaction, but subsequent slices provide less utility, exemplifying diminishing marginal utility.
### How does the Law of Diminishing Marginal Utility affect consumer behavior?
- [ ] It does not affect consumer behavior.
- [x] It causes consumers to diversify their consumption.
- [ ] It leads to unlimited consumption of a single good.
- [ ] It results in constant utility per unit consumed.
> **Explanation:** Consumers diversify their consumption to maximize total utility, in response to the diminishing satisfaction from consuming additional units of the same good.
### A consumer is experiencing diminishing marginal utility when what happens?
- [ ] Their satisfaction levels rise exponentially with each unit consumed.
- [x] The additional satisfaction from consuming an extra unit decreases.
- [ ] Every consumed unit brings the same satisfaction.
- [ ] Consuming more units leads to marginal cost increase.
> **Explanation:** The marginal utility decreases as the consumer consumes more units, showing diminishing marginal utility.
### Why is understanding diminishing marginal utility important for businesses?
- [ ] It helps in predicting constant customer loyalty.
- [x] It aids in pricing strategies and product offerings.
- [ ] It shows that increasing prices will not affect demand.
- [ ] It means total utility will always decrease.
> **Explanation:** Knowing the diminishing marginal utility helps businesses in setting prices and understanding how additional consumption affects satisfaction.
### If a person enjoys their first scoop of ice cream but enjoys less with each additional scoop, what principle is being demonstrated?
- [ ] Increasing Marginal Utility
- [x] Diminishing Marginal Utility
- [ ] Constant Marginal Utility
- [ ] Surplus Utility
> **Explanation:** The person is experiencing diminishing marginal utility as their enjoyment decreases with each additional scoop.
### How does diminishing marginal utility relate to the Law of Demand?
- [ ] It doesn’t relate at all.
- [x] Both concepts show that additional uses or purchases bring lesser utility or demand.
- [ ] High utility means higher consumption regardless of price.
- [ ] The Law of Demand ignores utility aspects.
> **Explanation:** Both diminishing marginal utility and the Law of Demand illustrate that the additional utility or demand falls as consumption or price increases.
### Why might the marginal utility increase in rare cases?
- [ ] When the good becomes faulty.
- [ ] If marginal cost is zero.
- [x] If a consumer finds a new use or becomes more accustomed to the good.
- [ ] Because total utility can’t decrease.
> **Explanation:** In rare scenarios, if a consumer finds a new use or adapts to a good, the marginal utility could temporarily rise.
### What happens when total utility starts to decline?
- [ ] Marginal utility is increasing.
- [ ] It’s remaining constant.
- [x] Marginal utility turns negative.
- [ ] It doesn't affect consumption.
> **Explanation:** When total utility begins to decline, it indicates that the marginal utility has turned negative, meaning additional consumption creates dissatisfaction.
### In a practical scenario, how could a coffee shop utilize the Law of Diminishing Marginal Utility?
- [ ] By offering unlimited refills without considering consumer utility.
- [x] By creating diversified sizes or complementary items to increase overall satisfaction.
- [ ] By ensuring customers consume only large sizes.
- [ ] By assuming constant satisfaction for every cup sold.
> **Explanation:** Understanding diminishing marginal utility helps a coffee shop by offering varied sizes or complementary products to sustain consumer satisfaction.
Thank you for diving into the Law of Diminishing Marginal Utility and challenging yourself with this quiz. Mastering these concepts is a vital part of understanding consumer behavior and economic principles.
