Humans Have Goals. And They Value Goods and Services Accordingly.
Why do individuals value bread less than gold, when bread is obviously more “useful” than gold? To provide an answer to this question economists refer to the law of diminishing marginal utility.
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 may derive vast satisfaction from consuming one cone of ice cream. However, the satisfaction he will derive from consuming a second cone might also be great, but not as much 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 held 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.
Now, according to mainstream thought, since gold is relatively scarcer than bread it follows then that the price of gold should be higher than the price of bread, because the marginal utility derived from bread is going to be much lower than the marginal utility derived from gold. On the same basis we can also derive that notwithstanding that air is essential for human life, due to its almost unlimited supply individuals are likely to assign to air a much lower price than to bread.
Utility in this way of thinking is presented as a certain quantity that increases at a diminishing pace as one consumes or uses more of a particular good. Given that utility is presented as some total quantity, also called total utility, it becomes possible to introduce mathematics here to ascertain the addition to this total, which is referred to as additional utility or marginal utility. However, does it make sense to discuss the marginal utility of a good without referring to the purpose that it serves?
According to Carl Menger, the founder of the Austrian school of economics, individuals assign priorities to the various goals that they wish to achieve. As a rule, according to Menger, the highest priority will be assigned to life maintenance. The various ends that an individual will find useful for his life maintenance will be assigned a descending rank in accordance with his own preferences:
As concerns the differences in the importance that different satisfactions have for us, it is above all a fact of the most common experience that the satisfactions of greatest importance to men are usually those on which the maintenance of life depends, and that other satisfactions are graduated in magnitude of importance according to the degree (duration and intensity) of pleasure dependent upon them. Thus if economizing men must choose between the satisfaction of a need on which the maintenance of their lives depends and another on which merely a greater or less degree of well-being is dependent, they will usually
Article from Mises Wire