This section is from the "Elementary Principles of Economics" book, by Richard T. Ely and George Ray Wicker. Also available from Amazon: Elementary Principles Of Economics: Together With A Short Sketch Of Economic History
Illustrations of the Law. The wants of men are innumerable and, considered as a whole, are never satisfied. There seems to be no limit to the variety of things desired. But if we single out any one commodity, we find that our desire for it is limited. We have all heard of the king who wanted gold and who got so much that he finally loathed the sight of it. The story of King Midas is but an illustration of what the economists call the law of diminishing utility or the law of satiable demand. Let us consider the case of a desert traveller who, having long before exhausted his supply of water, comes upon an oasis with a cooling spring. The first cup of water may save his life, and would therefore have a utility which we may call absolute. A second cup may still have a very high degree of utility ; but if we suppose him to continue the drinking, we know that the later additions to his satisfaction will gradually grow less and that he cannot go on long without coming to a point where any further consumption will cause not pleasure but pain.
This is graphically represented in the figure on page 88.
In the figure, let the equal spaces 1, 2, 3, 4, 5, 6, 7 on the line AB represent equal portions of water, and let the perpendicular lines represent the height to which satisfaction rises in drinking the respective portions. Then the parallelograms would represent the total satisfaction derived from the successive acts of consumption. It will be noticed that the first parallelogram is left open at the top. This is because in the b example the utility of the first cup of water, since it saved life, is not susceptible of measurement. The line at the right, therefore, is to be thought of as a continuing line rather than as terminating at a.
If now we think of the man as drinking successive portions of the water which are very small, mouthfuls, for instance, our figure would have to be drawn as follows:
a Here, as before, the utility of the first water consumed is absolute, and therefore the curved line AB is represented as not touching the perpendicular OY in any point. The different increments consumed are to be thought of as points along the line OX, and the satisfaction derived from any increment, as m, is measured by a perpendicular, as mn, cutting the curve of diminishing utility. The curve cuts the horizontal OX in the point B, representing the point at which utility from the water ceases, and disutility would begin should consumption continue.
With the figures and example clearly in mind, let us now consider some of the particulars. Each unit of the commodity consumed is called an increment of supply or an increment of consumption. The utility of the first unit, which in this case is absolute, is called the initial utility. The potential utility of an increment not actually possessed or consumed is called the marginal utility. But note this. In our diagram and in the example, we have assumed that the consumption of water is carried to a point beyond which further consumption would give no satisfaction, and therefore the marginal utility in this case is 0. But if we had assumed that the consumption had stopped at m, then the marginal utility of the consumption would be represented by the utility of the unit m, as measured by the perpendicular mn.
But the law which we are studying is of wider application than to the mere case of consumption. It applies as well to possession. Whenever we have a stock of any commodity, we realize that the commodity has a utility for us even when we are not in the act of consuming it. The law applies therefore to the utility of the commodity whether we are actually consuming it or are retaining the power to consume it at some future time.
Formal Statement of the Law. We are now prepared to understand a formal statement of the important economic law of diminishing utility. It is as follows: At any given time the marginal utility of any commodity to its owner decreases with every increase of the stock of it.
Limitation. Notice that this statement of the law contains the qualification, at any given time. The importance of this qualification becomes evident when we return to a consideration of our illustration. We know that when the utility of water has fallen to zero, it needs not long to wait before the satisfaction to be derived from con-
sumption again becomes keen. With the consumption of some things, the importance of the qualification becomes even greater. A boy finds that any clothing beyond a very small amount has a low added utility for him. But as he grows into young manhood, his wants change so far that a much larger supply of clothes has as great a marginal utility as his slender stock possessed before. Whenever different times are considered, therefore, we must make complete allowance for the change of wants in the interval.
The Case of Money. With this in mind, we may say that the law of diminishing utility applies to money as to all other goods, although the rate of diminishing utility is much slower, because money represents general purchasing power and permits variety in consumption. With variety in consumption, as we all know from experience, satiety is reached more slowly than without it. Nevertheless, at any given time the hundredth dollar of one's stock has a lower utility than the ninety-ninth or any other preceding one. Thus it follows that to a rich man, other things being equal, money has a less marginal utility than to a poor man.
1. The law of diminishing utility explains how increasing supply
means decreasing utility per unit of supply.
2.Initial utility is the utility of the first unit; marginal utility, the potential utility of a unit not possessed; total utility, that of all the units.
1. How great is the marginal utility of air under ordinary
2.How does the law of diminishing utility apply when the consumption of commodities is carried beyond the point of zero utility ? Illustrate by diagram.
3.Give illustrations of the importance of the qualifying phrase " at any given time."
4.What significance has the law as bearing upon the comparative condition of the rich and the poor ?
See preceding chapter. Also: — Clark, J. B.: Distribution of Wealth, Ch. XIV, pp. 209-213.
Devine, E. T.: Economics, Ch. V, pp. 86-92.
Marshall, A.: Principles of Economics, Bk. III, Ch. III, §§ 1-4.