Diminishing Marginal Returns
Economics: IB Diploma, topic 1.1.2
Diminishing Marginal Returns
Diminishing marginal returns is the concept that the more of something you add, the lower the impact of each additional unit, assuming all else is fixed.
The law of diminishing marginal utility
- Marginal utility is the extra benefit to an individual of consuming a good or service.
- The law of diminishing marginal utility states that the more an individual consumes (ceteris paribus) the utility of the good/service decreases with every additional unit consumed.
Example of diminishing marginal utility
- Diminishing marginal utility.
- The first slice of Domino's pizza is very satisfying, but the 100th may not be quite as enjoyable.
- Your tastes can be satiated (you can have enough of something). Eventually, the marginal utility of another slice of pizza may be negative.
The demand curve
- The law of diminishing marginal returns can explain why the demand curve slopes downwards. As the quantity purchased rises, the price that consumers are willing to pay falls.
- Consumers may be willing to pay a lower price for a higher volume because they gain less utility (or satisfaction) from each extra unit.
Test yourself on Diminishing Marginal Returns
What is the level of consumption determined by?
Which economic concept does this describe?
"The more of an input you add, the lower the impact of each additional unit, assuming all else is fixed"What could explain the downward sloping shape of the demand curve?