Law of Diminishing Marginal Utility

One of the main principles behind mainstream, neoclassical economic theory, is that individuals act to maximize their utility. Utility is generally defined as a satisfaction (pleasure) that an individual derives from consuming or using a specific good or service. Total utility indicates the total amount of satisfaction or pleasure an individual derives from consuming some specific quantity of a good or service. Marginal utility refers to the additional satisfaction a consumer gets from an additional unit of a good or service she/he consumes during a given period of time.

The law of diminishing marginal utility states that as an individual consumes more units of a specific good or service, the additional utility the consumer derives from the successive units diminishes over time. Thus diminishing marginal utility explains a lot about consumer behavior in the market economy.

• Does the law of diminishing marginal utility hold for all goods and services we buy and consume? What are the exceptions?
• As a manager, what are some practical things you could do to raise marginal product per employee that also benefit the firm? In your answer use a company you currently work for or one you worked for in the past.
• Give specific examples and discuss how diminishing marginal productivity affect marginal revenues and profits of firms.

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