Diminishing marginal utility

Diminishing marginal utility is the economic principle stating that as a person consumes additional units of a good or service, the satisfaction (utility) gained from each successive unit decreases. German economist Hermann Heinrich Gossen first articulated this concept in 1854, which is why it is sometimes called Gossen's First Law. The principle became central to economic theory after William Stanley Jevons, Carl Menger, and Leon Walras independently developed marginalist frameworks in the early 1870s^[1].

Historical development

Gossen's pioneering work

Gossen published "Die Entwicklung der Gesetze des menschlichen Verkehrs" (The Development of the Laws of Human Intercourse) in 1854. His book presented a systematic theory of diminishing satisfaction and derived implications for consumer behavior and market exchange. Unfortunately, German economists of his era showed little interest. Most copies went unsold and were destroyed. Gossen died in 1858, largely forgotten^[2].

His work remained obscure until the 1870s when marginalist economists rediscovered it. Jevons acknowledged Gossen's priority in later editions of his own writings. Today, economists recognize Gossen as a genuine pioneer whose ideas preceded the marginalist revolution by nearly two decades.

The Marginalist Revolution

Three economists working independently arrived at similar conclusions around 1871-1874:

William Stanley Jevons (England) - His 1871 "Theory of Political Economy" argued that value depends entirely on utility, specifically "final utility" - what we now call marginal utility
Carl Menger (Austria) - His 1871 "Grundsatze der Volkswirtschaftslehre" founded the Austrian school of economics
Leon Walras (Switzerland) - His 1874 "Elements of Pure Economics" developed general equilibrium theory using marginal concepts

Alfred Marshall later synthesized these ideas with classical economics in his 1890 "Principles of Economics," making marginal utility analysis accessible to English-speaking economists^[3].

The principle explained

Consider eating pizza slices. The first slice satisfies intense hunger and provides substantial enjoyment. The second slice still tastes good but adds less pleasure than the first. By the fourth or fifth slice, additional consumption might add almost nothing to satisfaction - or could even become unpleasant.

This pattern reflects human psychology and physiology. Needs become satiated. Novelty wears off. Bodies reach limits. The twentieth bite of candy offers little beyond the nineteenth. A person dying of thirst values the first glass of water enormously; the tenth glass, very little^[4].

Mathematically, total utility increases with consumption but at a decreasing rate. Marginal utility - the additional satisfaction from one more unit - starts high and falls progressively. At some point, marginal utility reaches zero (satiation) or even becomes negative (overconsumption).

Assumptions and conditions

The law operates under several assumptions:

Homogeneous units: All consumed units must be identical in quality and quantity
Continuous consumption: Units should be consumed in reasonably rapid succession
Constant consumer: Tastes, preferences, and circumstances remain unchanged
Rational behavior: Consumers act to maximize utility

Violations of these conditions can alter the expected pattern. Collector items, for instance, may not exhibit diminishing marginal utility since each item has unique characteristics. Status goods sometimes display the opposite pattern - more consumption signals wealth and provides increasing social utility^[5].

Economic implications

Consumer equilibrium

Rational consumers allocate budgets so that the marginal utility per dollar spent equals across all goods. If coffee provides more utility per dollar than tea, the consumer buys more coffee until its marginal utility falls enough to equalize. This equimarginal principle guides purchasing decisions.

Demand curve derivation

Diminishing marginal utility explains why demand curves slope downward. As marginal utility falls with additional consumption, willingness to pay declines correspondingly. Consumers buy more only at lower prices. The demand curve reflects this inverse relationship between price and quantity demanded^[6].

Progressive taxation

The marginal utility of income likely diminishes. An extra $1,000 means more to someone earning $20,000 than to someone earning $200,000. This reasoning supports progressive tax systems where higher incomes face higher marginal rates. Taking $1,000 from a wealthy person sacrifices less total utility than taking it from a poor person.

Water-diamond paradox

Classical economists puzzled over why water (essential for life) costs less than diamonds (merely decorative). Marginal utility resolves this: water is abundant, so its marginal utility is low despite high total utility. Diamonds are scarce, giving them high marginal utility and high prices.

Criticisms and limitations

Several objections challenge the principle:

Measurement difficulties: Utility cannot be directly measured or compared between people
Addictive goods: Substances like drugs may show increasing marginal utility initially
Network effects: Some goods become more valuable as more people use them
Psychological complexity: Human satisfaction follows patterns more complex than simple diminishment

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References

Gossen H.H. (1854). Die Entwicklung der Gesetze des menschlichen Verkehrs, Braunschweig
Jevons W.S. (1871). The Theory of Political Economy, Macmillan
Menger C. (1871). Grundsatze der Volkswirtschaftslehre, Vienna
Marshall A. (1890). Principles of Economics, Macmillan
Stigler G.J. (1950). The Development of Utility Theory, Journal of Political Economy

Footnotes

<references> <ref name="fn1">[1] Historical origins with Gossen (1854) and marginalist revolution (1871-1874)</ref> <ref name="fn2">[2] Gossen's forgotten contribution</ref> <ref name="fn3">[3] Jevons, Menger, Walras, and Marshall contributions</ref> <ref name="fn4">[4] Intuitive examples of diminishing satisfaction</ref> <ref name="fn5">[5] Standard assumptions underlying the law</ref> <ref name="fn6">[6] Connection to downward-sloping demand</ref> <ref name="fn7">[7] Modern ordinal utility approach</ref> </references>

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