A Level Economics AQA Practice Exam

What principle explains why marginal utility tends to decrease as consumption increases?

1. Law of Increasing Marginal Returns

2. Law of Diminishing Marginal Utility

3. Law of Supply and Demand

4. Law of Supply Elasticity

The correct answer is: Law of Diminishing Marginal Utility

The principle that explains why marginal utility tends to decrease as consumption increases is known as the Law of Diminishing Marginal Utility. This concept states that as a person consumes more units of a good or service, the additional satisfaction (or utility) gained from each successive unit will eventually decline. When a consumer first consumes a product, the utility they derive is typically high because they are satisfying a strong want or need. However, as they continue to consume additional units, the pleasure or satisfaction that each additional unit provides diminishes. For example, consider someone eating slices of pizza; the first slice may bring a great deal of satisfaction, the second slice might still be enjoyable, but by the time they reach the third or fourth slice, they may find that each additional slice contributes less to their overall happiness or satisfaction. This principle is crucial in understanding consumer behavior and demand, as it explains why individuals do not consume goods indefinitely. Instead, as the perceived value or utility of each additional unit decreases, consumers are less willing to pay as much for each subsequent unit, reflecting their preferences and the limits of their needs.