Marginal Utility Is Not Rocket Science

Marginal Utility Is Not Rocket Science

Mises Daily: Tuesday, June 05, 2007 by Frank Shostak

Why do individuals pay much higher prices for some goods versus other goods? The common reply to this is the law of supply and demand. But what is behind this law? To provide an answer to this question economists refer to the law of diminishing marginal utility.At that point, most people stop listening. Too technical for me! But in fact, it is not. The concept of marginal utility is the essential building block of a sound theory of human action as it applies in the science of economics. But too often, the mainstream theory is misleading. So I offer this Austrian attempt to demystify the idea.

Mainstream economics explains the law of diminishing marginal utility in terms of the satisfaction that one derives from consuming a particular good. For instance, an individual derives vast satisfaction from consuming one cone of ice cream. The satisfaction he will derive from consuming a second cone might also be vast but not as vast as the satisfaction derived from the first cone. The satisfaction from the consumption of a third cone is likely to diminish further, and so on.[1]From this mainstream economics concludes that the more of any good we consume in a given period, the less satisfaction, or utility, we derive out of each additional, or marginal, unit.

From this it is also believed that if the marginal utility of a product declines as we consume more and more of it, the price that we are willing to pay per unit also declines.Since various goods generate different magnitudes of utility, mainstream thinkers have concluded that consumers should allocate their money income in such way that the marginal utility per dollar spent is the same for all goods purchased.

Utility in this way of thinking is presented as a certain quantity that increases at a diminishing pace as one consumes more of a particular good.The question that arises in response to this way of thinking is how can one talk about a utility or a benefit that a good offers without stipulating the purpose that a particular good serves?

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