Final answer:
The Marginal Principle in economics states that individuals should produce or consume where the highest valued alternative is forgone. It involves making decisions at the margin by comparing the marginal benefits to the costs or foregone alternatives. The law of diminishing marginal utility explains how the marginal gains from consuming a good tend to decrease as more units are consumed, while the opportunity cost of consuming alternatives increases.
Step-by-step explanation:
The Marginal Principle is a concept in economics that suggests individuals should produce or consume where the highest valued alternative is forgone in the pursuit of an activity. In other words, it means making decisions at the margin, considering the additional benefit (marginal utility) gained from an activity compared to the cost or foregone alternatives. For example, a rational consumer would continue to purchase additional units of a product as long as the marginal utility exceeds the opportunity cost.
According to the law of diminishing marginal utility, as a person consumes more of something, the additional marginal gains tend to become smaller. This means that the marginal utility of a good will decrease as more units are consumed. At the same time, the opportunity cost, which represents the value of the foregone alternative, will increase. Eventually, the opportunity cost will exceed the marginal utility of consuming more units, and a rational consumer will stop purchasing.
For instance, if a person is considering buying more bus tickets, the marginal utility of the tickets will diminish as they consume more, while the opportunity cost, represented by the foregone utility of consuming burgers instead, will increase. When the opportunity cost exceeds the marginal utility of an additional bus ticket, a rational consumer would not purchase more tickets.