diminishing marginal utility

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Law of Diminishing Marginal Utility

In economics, the theory that for each additional unit of a product an individual consumes, the less utility or satisfaction the person derives from it. This is important to determining how much supply of a product the market can handle without diminishing demand. Historically, it has been thought that one can quantify the marginal utility of each unit, but some economists disagree with this. See also: Austrian school.
Diminishing marginal utilityclick for a larger image
Fig. 45 Diminishing marginal utility. To a hungry man the utility of the first slice of bread consumed will be high (Oa) but as his appetite becomes satiated, successive slices of bread yield smaller and smaller amounts of satisfaction; for example, the fifth slice of bread yields only Ob of additional utility.

diminishing marginal utility

a principle that states that as an individual consumes a greater quantity of a product in a particular time period, the extra satisfaction (UTILITY) derived from each additional unit will progressively fall as the individual becomes satiated with the product. See Fig. 45 .

The principle of diminishing MARGINAL UTILITY can be used to explain why DEMAND CURVES for most products are downward sloping, since if individuals derive less satisfaction from successive units of the product they will only be prepared to pay a lower price for each unit.

Demand analysis can be conducted only in terms of diminishing marginal utility if CARDINAL UTILITY measurement is possible. In practice, it is not possible to measure utility precisely in this way, so demand curves are now generally constructed from INDIFFERENCE CURVES, which are based upon ORDINAL UTILITY. See CONSUMER EQUILIBRIUM, REVEALED PREFERENCE.

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