Diminishing Marginal Utility

Definition

Diminishing marginal utility is an economic principle that states that as a person consumes more of a good, the additional satisfaction or benefit derived from each successive unit of that good decreases. In other words, the more of a product a person has, the less value they place on acquiring an additional unit of that product.

5 Must Know Facts For Your Next Test

1. Diminishing marginal utility explains why consumers are willing to pay less for additional units of a good as they consume more of it.
2. The principle of diminishing marginal utility is a key factor in determining consumer demand and the shape of the demand curve.
3. Diminishing marginal utility applies to most goods and services, but the rate at which marginal utility decreases can vary depending on the product and individual preferences.
4. Diminishing marginal utility is a crucial concept in understanding consumer behavior and decision-making, as it helps explain why consumers make tradeoffs and substitute goods.
5. The principle of diminishing marginal utility is often used to justify progressive taxation, as the additional benefit of income decreases as a person's wealth increases.

Review Questions

• Explain how the principle of diminishing marginal utility relates to consumer choice in the context of 6.1 Consumption Choices.
  • The principle of diminishing marginal utility is central to understanding consumer choice in the context of 6.1 Consumption Choices. As consumers purchase more units of a good, the additional satisfaction or benefit they derive from each successive unit decreases. This means that consumers will be willing to pay less for additional units of a good, which in turn affects their demand and consumption decisions. Diminishing marginal utility helps explain why consumers make tradeoffs between goods and services, as they seek to maximize their overall utility by allocating their limited resources across different consumption choices.
• Analyze how the concept of diminishing marginal utility influences the shape of the demand curve for a particular good or service.
  • The principle of diminishing marginal utility directly influences the shape of the demand curve for a good or service. As consumers purchase more units of a product, the marginal utility they derive from each additional unit decreases. This means that consumers will be willing to pay less for each successive unit, resulting in a downward-sloping demand curve. The steepness of the demand curve reflects the rate at which marginal utility diminishes, with goods that exhibit a rapid decline in marginal utility having a more steeply sloped demand curve. Understanding how diminishing marginal utility shapes the demand curve is crucial for firms in pricing their products and understanding consumer behavior.
• Evaluate how the principle of diminishing marginal utility can be used to justify progressive taxation policies in the context of 6.1 Consumption Choices.
  • The principle of diminishing marginal utility can be used to justify progressive taxation policies in the context of 6.1 Consumption Choices. The argument is that as an individual's income increases, the additional satisfaction or benefit they derive from each successive dollar of income decreases. In other words, the marginal utility of income diminishes as wealth increases. This means that higher-income individuals derive less utility from an additional dollar of income compared to lower-income individuals. Progressive taxation, where tax rates increase as income rises, can be seen as a way to equalize the marginal utility of income across different income levels, thereby promoting greater overall societal welfare. This aligns with the goal of 6.1 Consumption Choices, which focuses on how consumers make decisions to maximize their utility given their budget constraints.

Related terms

Utility: The satisfaction or benefit that a consumer derives from the consumption of a good or service.

Marginal Utility: The additional satisfaction or benefit a consumer derives from consuming one more unit of a good or service.

Law of Diminishing Marginal Returns: The principle that as more of a variable input is added to a fixed input, the marginal product of the variable input will eventually decrease.