Diminishing Marginal Utility

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In conversations related to pricing with a few florists this week several asked about the definition of diminishing marginal utility.

The “utility” part is where the confusion comes in. Utility really depends on the product. The utility provided by gasoline is the ability to travel a certain distance. The utility provided by ice cream is enjoyment. The utility provided by a video game is fun. It all depends on what you are consuming.

The “diminishing” part means there is less of that utility with each additional unit of the product. Food is great, but the first mouthful is generally the best, with each subsequent mouthful being a little less pleasurable. Same thing with video games – they’re fun for a while but eventually even kids will turn them off and go outside.

It doesn’t always apply. I mentioned gasoline earlier. Each unit of gasoline provides the same utility (distance traveled) as the one that came before. That utility does not diminish.

There are several real-world examples and an excellent definition of diminishing marginal utility at the Beyond Cost Plus website. A number of other pricing concepts are explained and illustrated as well.

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