Law of Diminishing Marginal Utility
What is Law of Diminishing Marginal Utility?
The law of diminishing marginal utility states that each additional unit of a good consumed adds less extra satisfaction than the unit before it.
As consumption rises, marginal utility falls. It helps explain why demand curves slope downward, since consumers will only buy more at lower prices. It underlies the consumer's utility-maximizing choice.
Law of Diminishing Marginal Utility: a worked example
Track a hungry student eating pizza. Total utility runs 20, 36, 48, 56, 60, 60 utils after each successive slice. Subtract neighboring figures to get marginal utility: 20, 16, 12, 8, 4, 0. Every slice adds 4 fewer utils than the one before, which is diminishing marginal utility in numbers. Now attach dollars. If the student values a util at $0.25, the third slice is worth 12 × $0.25 = $3.00 and the fourth is worth 8 × $0.25 = $2.00. At a price of $2.50 the student buys the third slice, since $3.00 clears the price, and stops before the fourth, since $2.00 falls short. Drop the price to $1.75 and the fourth slice now clears. Falling marginal utility is exactly why a lower price is needed to sell another unit.
The mistake students make with law of diminishing marginal utility
Falling marginal utility gets read as falling total utility, so students claim the eater is worse off after the fourth slice than after the third. Total utility keeps climbing as long as marginal utility stays positive. A total utility run of 20, 36, 48, 56 still climbs from 48 to 56 even while the marginal figures fall from 12 to 8, and it only turns down once marginal utility goes negative. The related mix up is with diminishing marginal returns, a production idea about output from extra workers rather than a statement about a consumer's satisfaction.
Law of Diminishing Marginal Utility questions
Does total utility fall when marginal utility is falling?
Total utility keeps rising while marginal utility is positive, no matter how fast marginal utility is shrinking. A smaller positive addition still adds. Total utility peaks at the last unit with positive marginal utility, holds flat if marginal utility equals zero, and declines only once marginal utility turns negative, the point where an extra unit actively hurts. Graphed together, the total utility curve keeps rising but bends flatter with each unit added, and that shrinking steepness is exactly what the falling marginal utility curve beneath it is reporting.
What is the difference between diminishing marginal utility and diminishing marginal returns?
Diminishing marginal utility describes consumption: each extra unit a person consumes delivers less added satisfaction than the unit before. Diminishing marginal returns describes production: each extra unit of a variable input, such as another worker in a fixed size kitchen, adds less output than the input before it. One sits on the demand side and is measured in utils, the other sits on the cost side and is measured in units of output.
Why does diminishing marginal utility explain the law of demand?
Buyers pay for a unit only when the satisfaction it delivers is worth at least the price. Since each extra unit delivers less satisfaction, the amount a buyer will pay for the next unit keeps falling. Selling a larger quantity therefore requires a lower price, which traces out a downward sloping demand curve. The same logic produces consumer surplus, the gap between what the earlier units were worth and the single price actually paid for all of them.
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