Sunday, August 21, 2011

Diminishing Marginal Utility and Why the Demand Curve Slopes Down

In life, it generally holds true that the more of something you have, the less you value it. This property is referred to as Diminishing Marginal Utility. Diminishing Marginal Utility is an economics term which basically states that the more of good X you consume, the less the utility you will gain out of consuming the next unit of it.
While you might value the first sip of water after exercizing a lot, the twentieth sip will have almost no value, and at a certain point, you might actually not want any more.

(in this diagram: while the consumer is willing to pay six dollars for the third unit, they are only willing to pay four dollars for the fourth. this displays diminishing marginal utility)

Diminishing Marginal Utility serves as a great explanation as to why the demand curve slopes down for a normal good. As the quantity increases, the willingness to pay for the next unit of the good decreases as well.

It's a simple concept, but very useful when it comes to understanding the demand curve.

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