Diminishing Marginal Utility: Definition, Principle & Examples

Diminishing Marginal Utility: Definition, Principle & Examples
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  • 0:02 What Is Diminishing…
  • 0:28 The Meaning of Utility
  • 1:11 The Concept
  • 2:09 Examples
  • 3:44 Lesson Summary
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Lesson Transcript
Instructor: Wren Hawthorne
Diminishing marginal utility is an important concept in economics and helps explain consumer demand. In this lesson, we will explore this topic, look at some real-world examples, and end with a quiz.

What Is Diminishing Marginal Utility?

When you have that first bite of chocolate cake, it seems like you just can't get enough of it! However, as you eat your second and third piece, you may start to realize you have had enough cake. For each additional unit of a good, (in this case for each additional piece of cake) the added satisfaction you receive from consuming the good decreases. This is known as diminishing marginal utility.

The Meaning of Utility

The field of economics is concerned with examining issues of the supply and demand of goods and services. The Rational Choice Assumption establishes that people make choices about purchasing goods or services depending on what is in their best self-interest.

You might wonder how economists measure what is in someone's best self-interest? This is where the concept of utility comes in. Think of utility as the benefit a person gets from consuming a good or service. In our example, utility is the satisfaction a person gains from eating a piece of chocolate cake. It's important to understand that the concept of utility is a relative concept. Different people gain different levels of satisfaction from eating chocolate cake, depending on their preferences.

The Concept

Now that we understand that utility measures the satisfaction a person gains from consuming a good or service, we can think about how utility changes as a person consumes more of a good. In our example, the utility is the highest for the first piece of chocolate cake the person eats. Let's say the person has been saving room for dessert, and that first piece of cake satisfies their sweet tooth perfectly.

However, there is still more cake to be eaten. So, rather than let it go to waste, the person decides to have a second piece (we have all been there)! The second piece is still good, but not quite as fulfilling as that first piece. For the sake of a good example, let's say the person has a third piece. By this time, their waistband is getting a little tight, and perhaps their stomach isn't feeling too well. The satisfaction of this third piece is definitely not as high as the first or the second piece. This example demonstrates diminishing marginal utility.

Diminishing Marginal Utility: Examples

Now that we know what the concept of diminishing marginal utility is, let's take a look at a real-world example.

Buffets are a prime example of restaurants depending on diminishing marginal utility. For one price, you can eat all of the food you want. The reason that buffets work economically, is that people reach a point where the utility (pleasure) gained from an additional plate of food isn't worth the cost of eating that additional plate.

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