I've just started a microeconomics course and the instructor has talked about diminishing marginal utility. I understand what it is, but I'm struggling to understand why it matters. What are the real world consequences of diminishing marginal utility being true??
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$\begingroup$ Have you considered asking your instructor? It is a good habit to get into! $\endgroup$– GiskardCommented Jul 22, 2023 at 12:28
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$\begingroup$ Yeah I'm going to you, but I just to do my own research. $\endgroup$– troy beckettCommented Jul 22, 2023 at 13:30
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$\begingroup$ Under expected utility theory, if a person has a diminishing marginal utility of wealth means then they are risk averse. Such a person will not take a fair bet and is willing to pay a risk premium to avoid risk. $\endgroup$– smccCommented Jul 24, 2023 at 13:14
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2 Answers
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An example of a real world consequence is that people tend to spread their consumption over many goods and experiences, rather than buy a lot of only a few types of goods. In response, the market provides a wide array of goods and services. For instance, most people do not pick one form of entertainment and spend all of their disposable income on that one thing, but rather choose a bundle that may include some combination of video streaming services, concerts, sporting events, movies, etc.
Why don't they just pick their "favorite" and spend all of their money on it? Diminishing marginal utility.
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1$\begingroup$ +1 for the point about people spreading their consumption. However, the fact that the market provides a wide variety of goods is only partly due to diminishing marginal utility. It's also due to people differing in their preferences. $\endgroup$ Commented Sep 21, 2023 at 10:00
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What is the signifacance of diminishing marginal utility?? What are the consequences of it being true??
The main significance of diminishing marginal utility is that value of a good or service declines as more of the good or service is acquired. This property is also important assumption in a lot of models and behind lot of proofs but that is too broad of an topic and beyond a scope of a single SE answer.
answered Jul 22, 2023 at 13:08
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$\begingroup$ "value of a good or service declines as more of the good or service is acquired" what is a real world consequence of this statement being true. $\endgroup$ Commented Jul 22, 2023 at 13:34
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1$\begingroup$ @troybeckett ? The value of goods and services dropping as there is more of them is itself the real world consequences... for example, as more oil is pumped from ground, ceteris paribus, value of oil drops $\endgroup$– 1muflon1 ♦Commented Jul 22, 2023 at 13:41
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$\begingroup$ But why would the value drop??? Surely the oil producers wants to maximise profit. Thanks for your comments really appreciate it $\endgroup$ Commented Jul 22, 2023 at 13:59
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2$\begingroup$ @troybeckett because of diminishing utility for consumers, producers can only charge as much as buyers are willing to buy, plus as I mention it requires ceteris paribus so there are no other changes $\endgroup$– 1muflon1 ♦Commented Jul 22, 2023 at 14:06