Law of Diminishing Marginal Utility

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Definition of the Law of Diminishing Marginal Utility:

The law of diminishing marginal utility states that the utility or satisfaction gained from each additional unit of a good or service consumed is less than the prior unit. In other words, the more you consume of a good or service, the less satisfied you will be with each successive use or consumption.

Detailed Explanation:

The law of diminishing marginal utility has several terms that need to be understood. Economists use "utility" as a measurement of satisfaction when consuming a good or service. "Marginal" is frequently used by economists to mean the next unit, so marginal utility is the satisfaction gained from consuming the next unit of a good or service.

The video illustrates the law of diminishing marginal utility when two bored and hungry college students have a doughnut eating contest. The first doughnut tastes great and helps satiate their hunger. On a scale of one to ten, both Todd and Corey may rate their "utility" or satisfaction a ten. The second doughnut is less satisfying. Perhaps for Todd, it is an eight, but for Corey, it is a seven. Finally when they reach their fifth doughnut Todd's satisfaction is one, and Corey's is negative. The video illustrates the law of diminishing marginal utility because each successive doughnut results in a lower level of satisfaction.

The doughnut eating contest illustrates the law of diminishing marginal utility for just doughnuts, but how would it relate to a decision to purchase a good or service? With every good or service, there comes a point where enough is enough. The satisfaction gained is just not worth the price. Assume you have been exercising intensely and you are incredibly thirsty. After leaving the gym, you proceed immediately to the juice bar. That first drink of lemonade is blissful. You buy a second glass. Half way through the second glass, you put the drink down and drink it slowly. You enjoy your second glass, but not nearly as much as the first. You decline when the waiter asks if you would like to purchase a third glass. It is not worth the price. As you are leaving, a friend arrives and offers to buy you a glass of lemonade. You are delighted to see your friend and decide to accept the offer. After the first sip, you regret ordering the drink because it causes you to feel bloated. The benefit of the first glass was great. The second glass provided less satisfaction than the first, but it was worth the price paid. However, the benefit derived from the third glass was not worth the price, even when it was free.

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