Economics Practice Test 2025 – Complete Exam Prep Guide

Diminishing marginal utility refers to the principle that as a person consumes more units of a good or service, the additional satisfaction (or utility) that they derive from each additional unit tends to decrease. This concept is grounded in the observation that after a certain point, each additional unit consumed contributes less to overall happiness or satisfaction than the previous units did.

For example, consider eating slices of pizza. The first slice may provide significant satisfaction because you are hungry, but as you continue to eat additional slices, the pleasure from each subsequent slice diminishes. This decline in the added satisfaction from consuming more units is what the principle of diminishing marginal utility highlights.

By showing that the utility gained per unit decreases as consumption increases, this concept helps to explain consumer behavior and demand. It provides insight into why consumers diversify their consumption rather than continuously purchasing more of the same good.