Economics, 3rd Edition

Diminishing marginal utility

 refers to the tendency 

for the additional satisfaction from consuming extra units of a good to fall.

diminishing marginal utility 

refers to the tendency for the additional satisfaction from consuming extra units of a 

good to fall

Most goods are assumed to exhibit diminishing marginal utility; the more of the good the consumer 

already has, the lower the marginal utility provided by an extra unit of that good.

The Marginal Rate of Substitution

Figure 5.9 shows an indifference curve and three combinations of cola and pizza represented by points A, 

B and C. We know that the consumer is indifferent between these combinations. Assume the consumer 

starts at the combination of cola and pizza represented by point C. Not surprisingly, if the consumer’s 

consumption of pizza is reduced, say from point C to point B, consumption of cola must increase to keep 

him equally happy. If consumption of pizza is reduced again, from point B to point A, the amount of cola 

consumed must increase yet again.

Starting at point C, moving to point B the consumer is willing to give up 5 pizzas to increase consump-

tion of cola from 5 litres to 12 litres. We know, however, that as the consumption of cola increases, that 

consumption will be subject to diminishing marginal utility. In our example, the consumer starts off with a 

relatively large amount of pizza and a small amount of cola. As we have seen earlier, it is logical to assume