Definition
Diminishing Marginal Utility
Diminishing marginal utility is the principle that each additional unit of a good consumed yields less extra satisfaction than the previous one.
The first cold drink on a hot day delights; the fourth adds little. This diminishing marginal utility underlies the downward-sloping demand curve, since people pay less for additional units, and explains why prices fall as quantity rises.
It also justifies progressive taxation: an extra rupee means more to a poor person than a rich one, so taxing higher incomes more is argued to cost less total welfare. The concept is foundational to consumer theory and welfare economics.
Related terms
- Gini CoefficientThe Gini coefficient is a measure of income or wealth inequality ranging from 0 (perfect equality) to 1 (one person holds everything), summarising distribution in a single number.
- Lorenz CurveThe Lorenz curve graphs the cumulative share of income (or wealth) held by the cumulative share of the population, visually depicting inequality.
- Income EffectThe income effect is the change in how much of a good people buy because a price change has altered their real purchasing power, separate from the substitution effect.
- Price Elasticity of DemandPrice elasticity of demand measures how sharply the quantity people buy responds to a change in price; elastic goods react strongly, inelastic ones barely react.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.