Theprinciple of diminishing marginal utility states that the utility or satisfaction gained from consuming each additional unit of a good or service is less than the previous unit.
Detailed Explanation:
The law of diminishing marginal utility has two terms that must be understood. Economists use the term “utility” to measure the satisfaction derived from consuming a good or service. “Marginal” is also frequently used by economists, and refers to the next unit. Therefore, marginal utility is the satisfaction gained from consuming the next unit of a good or service.
The video below features two bored and hungry college students engaged in a doughnut-eating contest. It illustrates the law of diminishing marginal utility. The first doughnut tastes fantastic and helps satisfy their hunger. Todd and Corey may rate their “utility” or satisfaction a ten on a scale of one to ten. However, the second doughnut is less satisfying than the first; Todd rates it as eight, while Corey rates it as seven. By the time they reach their fifth doughnut, Todd’s satisfaction drops to one, and Corey experiences a negative satisfaction. This scenario exemplifies the law of diminishing marginal utility, as each successive doughnut yields a lower level of satisfaction for both students.
The doughnut-eating contest illustrates the law of diminishing marginal utility, specifically with doughnuts, but it can also apply to purchasing goods or services. With every good or service, there comes a point when enough is enough, and the satisfaction gained no longer justifies the price.
Imagine you have been exercising intensely and are incredibly thirsty. After leaving the gym, you head straight to the juice bar. The first drink of lemonade is pure bliss. You decide to buy a second glass. Halfway through the second glass, you slow down and savor it. While you enjoy the second glass, it isn’t nearly as satisfying as the first one. When the waiter asks if you want to purchase a third glass, you decline because it no longer feels worth the price.
As you leave, a friend arrives and offers to buy you a glass of lemonade. Delighted to see your friend, you decide to accept the offer. However, after the first sip, you begin to regret your decision, as it makes you feel bloated. The first glass brought fantastic benefits, and the second provided some enjoyment, albeit less than the first, but it was still worth the price. However, the third glass, even when offered for free, did not provide enough benefits to justify having it.
