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What is the law of diminishing marginal utility?

Posted on April 15, 2014 at 10:20 AM

The law of diminishing marginal utility states that as you consume more of a good, your additional happiness from consuming one more unit falls. For example, you just ate your fourth taco and realize that the third taco gave you more additional satisfaction than the fourth. That's because of diminishing marginal utility. Say you just completed your seventh year of marriage, and realize that your additional happiness gained in the seventh year is less than the additional happiness gained in the sixth year. That's because of diminishing marginal utility.

Your total utility or total happiness increases as you consume more units of a product, however, the rate that your total utility increases will fall at some point. That is diminishing marginal utility.

Value lies at the margin: Water will give you more total satisfaction throughout your life than the diamonds that you own. However, the marginal utility of the last diamond you purchased is much greater than the last glass of water you drank. That idea along with the concept of scarcity explains why diamonds are so expensive and water is so cheap.

AP Macroeconomics / AP Microeconomics Unit 1 Basic Economic Concepts

Categories: AP Macroeconomics, Macro Unit 1 Basic Economic Concepts, Micro Unit 1 Basic Economic Concepts

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