Cambridge International as and a level Economics Ebook

Diminishing marginal utility: 
the fall in marginal utility as 
consumption increases.
KEY TERM
In considering the consumer’s equilibrium, it is 
necessary to remember that it is assumed that consumers 
have limited incomes, behave in a rational manner and 
seek to maximise their total utility. A consumer is said 
to be in equilibrium, assuming a given level of income, 
when it is not possible to switch any expenditure from, 
say, product A to product B to increase total utility. Th
is 
is referred to as the 
equimarginal principle
and can be 
represented as:
MU
P
MU
P
MU
P
MU
P
A
U
A
P
B
U
U
B
P
P
C
U
U
C
P
P
N
U
U
N
P
P
=
=
B
⋅⋅⋅ =
where 
MU 
=
marginal utility
P 
=
the price
A, B, C
and 
N 
=
 
diff erent products
So, if the marginal utility from consuming product 
A is ten units and the price is $5, the consumer is in 
equilibrium when consuming 20 units of product B if 
its price is $10 and so on.
Equimarginal principle: 
consumers maximise their utility 
where their marginal valuation for each product consumed 
is the same.
KEY TERM
It is possible to use marginal utility to derive an individual 
demand curve. Th
e fundamental principle of demand is 
that an increase in the price of a good leads to a reduction 
in its demand. Using the above principle, this can now be 
proved. Th
e value of the expression 
MU
P
A
U
A
P
will now fall 
as the price of A has increased. So, the marginal utility 
of A per dollar spent will now be less than on any other 
goods. Th
e consumer will therefore increase total utility by 
spending less on good A and more on all other goods. Th
is 
will in turn reduce the value of their marginal utility. 
In other words, the consumer only maximises total 
utility by buying less of good A. Th
e conclusion is that the 
demand curve for a good is downward sloping.