Be Aware of the Law of Diminishing Marginal Returns

If there's anything that I took away from my AP Economics class this year it would have to be the Law of Dminishing Marginal Return. Simply put, its "the marginal utility of a good or service is the utility gained (or lost) from an increase (or decrease) in the consumption of that good or service. In general, preferences display diminishing marginal utility. That is, the first unit of consumption of a good or service yields more utility than the second and subsequent units." 

There are countless diverse examples of this law that we encounter everyday. I was recently reminded of this while driving to school the other day. Once I passed that really slow grandpa on the highway (which yielded a good # of utils), I thought to myself is it really worth it to pass X more number of drivers? Now the L.D.M.R passes through my mind everyday. What does that really get me? What does it really get me to get another or more of X? Is it worth it to risk doing or being Z to get more X? 

Keeping this simple law in the back of our minds while we go through life can help us relax, become less materialistic (maybe even happier), and be less greedy (30sec blog post by Rajesh Setty).

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I'm really interested in behavioral economics and one psychology blog that I'm currently hooked on is called the Frontal Cortex by Wired Editor and Rhodes Scholar, Justin Lehrer.   Check it out

 

Posted on Tuesday, May 25, 2010