Economics – Indifference curves and budget lines | e-Consult

Diminishing marginal utility states that as a consumer consumes more of a good, the additional satisfaction (utility) gained from each additional unit of the good decreases. In other words, the marginal utility of consumption falls as consumption increases.

Diminishing marginal utility leads to convex-to-the-origin indifference curves. This is because as the consumer consumes more of one good, the additional satisfaction gained from consuming more of that good becomes less and less. Therefore, the consumer is willing to trade less of the good with diminishing marginal utility for the other good.

Diagram: (A diagram should be included here showing a convex-to-the-origin indifference curve. The axes should be labelled 'Good X' and 'Good Y'. The indifference curve should bow inwards towards the origin.)

Diminishing marginal utility has important implications for the demand curve. It explains why the demand curve is typically downward sloping. As the price of a good falls, consumers are willing to buy more of it because the additional satisfaction they gain from consuming each additional unit is relatively high (due to diminishing marginal utility). This leads to an increase in quantity demanded.