The Law of Marginal Utility

Human action is purposeful behaviour. By acting, persons aim to substitute a state of more uneasiness for a state of less uneasiness. This involves the use of goods as means to attain ends.

Choice is a fundamental feature of action. It demonstrates preference for certain ends and means while at the same time setting aside others. Importantly, while future choice is uncertain, the process whereby we choose is always performed according to the law of marginal utility.

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Let’s review this fundamental economic law as well as the importance of its elucidation to the history of economic thought.

Simply put, the law of marginal utility states that the greater the supply of a good, the lower the marginal utility; the smaller the supply, the higher the marginal utility.

When we refer to supply of a good – say, for example, quarts of raspberries – we assume the existence of equally-serviceable, homogeneous units. In other words, any of our quarts of raspberries is perfectly substitutable for another.

The utility of a quart of raspberries refers to the satisfaction that the ends to which we employ it provide. Because it is a scarce means capable of satisfying human ends, we may say that additional quarts of raspberries increase utility. However, because utility is subjective and cannot be measured in any way, it is incorrect to say that the utility of two quarts of raspberries is double that of one quart. In short, there is no arithmetical treatment of utility.

Action involves ranking available ends according to an individual value scale. For example, we may rank the available ends for quarts of raspberries (in order of most desirable to least desirable) as: eating, using as bait for hunting, drinking as a juice and so on. According to our individual value scale, the first quart of berries will be allocated to eating, the second to hunting, the third to drinking and so on. As we progress from one employment to the next, the utility of each successive employment for our quart of berries decreases.

In economics, decisions are made at the margin. Consider a supply of three quarts of berries. If one is faced with the choice of losing a single quart of berries, the third quart is considered the marginal unit. From our example, drinking the quart of berries as a juice is considered the marginal employment of the marginal unit. It is the lost utility associated with this end – the marginal utility – that will determine whether or not the decision is made to give up the third quart of berries. Conversely, if the supply is two quarts of berries and one is faced with the choice of gaining an additional unit, this decision will be based on the marginal utility of the third quart of berries.

Prior to the discovery of the law of marginal utility, economists were puzzled by the so-called “paradox of value.” It asked why platinum is valued higher than bread, considering that bread is much more useful than platinum.

The answer to the “paradox of value” is that persons do not choose between platinum in general and bread in general, or all platinum and all bread. Instead, a choice is made between tangible units of each good, such as one ounce of platinum and one loaf of bread. When viewed from the perspective of the available supply, it should be obvious that the marginal utility of one unit of platinum is greater than the marginal utility of one unit of bread.

Once again, decisions are made at the margin.



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  • About Gregory Cummings

    Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.

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