Pricing for diminishing marginal utility!

What a fantastic image to use when discussing marginal utility and the demand curve!

The Law of Diminishing Marginal Utility

• Marginal utility is the change in satisfaction from consuming an extra unit of a good or service
• Beyond a certain point, marginal utility may start to fall (diminish)
• If marginal utility is falling, then consumers may only be prepared to pay a lower price!
• This helps to explain downward sloping demand curve for a good or service

Maximising Utility

• With a single product, total utility is maximised when marginal utility is zero
• When multiple products are being chosen, the condition for maximising utility is that a consumer equalizes the marginal utility per pound spent
• The condition for maximising utility is:
• MUA/PA = MUB/PB
• Where: MU is marginal utility and P is price