Topic Videos

The Law of Diminishing Marginal Utility

Level:
A-Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC, NCFE, Pearson BTEC, CIE

Last updated 1 Jan 2025

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.

The Law of Diminishing Marginal Utility - A Level Economics Mastery

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.

Daily Email Updates

Subscribe to our daily digest and get the day’s content delivered fresh to your inbox every morning at 7am.

Signup for emails

© 2002-2025 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.