Diminishing Marginal Utility

The first cup of coffee in the morning can feel essential. The second is pleasant. The third adds little, and a fourth might be unwelcome. As consumption increases, the extra satisfaction from each additional unit tends to fall.

This principle explains several important economic patterns. It is one reason demand curves slope downwards: people are willing to buy more only if the price falls, because each extra unit is worth less to them. It explains why people prefer variety, spreading their spending across many different goods instead of buying more and more of one thing.

It also applies to money. An extra 1,000 means a great deal to someone with very little income, but much less to a millionaire. This idea is one argument used to support progressive taxation and is also relevant in understanding attitudes to risk: the pain of losing 1,000 often feels greater than the pleasure of gaining 1,000.

There are exceptions. Collectors, for example, may value each additional item in a set more as they get closer to completing it.