The Law of Diminishing Marginal Utility

In this episode of tutor2u’s A-Level Economics Mastery Series, Geoff Riley dives into the fascinating world of Utility Theory and the Law of Diminishing Marginal Utility. Learn how economists explain consumer choices and the downward-sloping demand curve through concepts like total utility, marginal utility, and the point of maximised satisfaction.

Here are the main points:

1. Utility: Utility refers to the satisfaction or well-being derived from consuming goods and services. It is subjective and serves as a theoretical tool to understand consumer behavior.
2. Marginal Utility: This is the additional satisfaction gained from consuming one more unit of a good or service. Examples illustrate how marginal utility decreases with additional consumption.
3. Law of Diminishing Marginal Utility: As consumption of a good increases, the extra satisfaction (marginal utility) gained from each additional unit decreases, explaining the downward-sloping demand curve.
4. Maximizing Total Utility:
   • For a single product: Total utility is maximized when marginal utility reaches zero.
   • For multiple products: Consumers maximize utility by equalizing the marginal utility per unit of currency spent across products (MU/P).
5. Disutility: The negative satisfaction or discomfort experienced from activities or consumption, such as unpleasant work or consuming unhealthy food.
6. Applications:
   • The concept underpins rational consumer behaviour, helping allocate resources effectively.
   • It explains why people pay less for additional units and how price cuts stimulate demand.
7. Challenges to Realism:
   • Utility is subjective and varies by individual preferences and context.
   • Non-linear effects, social factors, and behavioural biases (like status goods) can complicate the theory.