Diminishing Marginal Utility – What Does It Mean?
Economists talk about diminishing marginal utility, which is a generic way of saying that we value stuff less the more we already have of that particular “stuff.” In other words, if I have three eggs, a fourth egg is worth less to me that the third one (which is worth less than the second one, which is worth less than the first one). Perhaps you buy this without need for further argument, but many don’t. And the concept is actually problematic unless we already think as economists. The reason for this is that when illustrating economic problems we tend to use everyday examples that anyone understands, but the intuitive materialism of people’s thinking potentially undermines the economic case.
In order to understand what diminishing marginal utility means, one cannot think solely about physical goods but about their “nature” as subjectively appreciated by a specific person. To put it differently, we are not discussing physical items but economic goods. An economic good is simply a scarce (or believed scarce) means that is usable toward an appreciated end. This is a fundamentally important point – in the example above, an economist isn’t really talking about eggs, but lets eggs illustrate a commonly traded good that has specific uses.
What uses? Well, this is where people differ. Some like eggs because they eat an egg for breakfast; others like eggs because they want to bake a pie; still others want eggs to throw at protesters participating in a manifestation for [fill in the blank]. The purpose of getting an egg matters. It matters for how we value something (if you’re hungry, you’ll probably value an egg for food more highly that an egg to throw at your favorite ideological opponent). But it also matters for how we consider it a good – and therefore what is implied in terms of that good’s complements and substitutes. It is simply not the case that a bun is a complement to a hot dog. They’re complementary only to the degree we wish to use and value them together (and this may very well be the case to many in this particular example).
This is why we may in certain situations value a hot dog to 3 and a bun to 2 but a bun with a hot dog to 6. These are three different economic goods, but the third one is a good and is valued more highly because we consider the two complementary: we like the combination better than the two goods separately. For cultural, practical and other reasons, many uses and valuations are inter-subjective, but that may not always be the case.
So what does this have to do with diminishing marginal utility? Because we need to know we are comparing the same things and not talking about apples and oranges (or, as in this case, eggs and eggs). A common counterexample to the eggs example that many students tend to figure out right away is that one may value the first egg for breakfast more than the second, and so ne. But with a six pack, one has enough eggs to make a pie – and that’s way more valuable than five breakfast eggs. But this counterexample confuses the physical composition of “an egg” with the economic concept of a good. Six eggs acquired to make a pie is not the same thing as six individual eggs boiled for six consecutive breakfasts! The owner of six eggs can choose between the two uses (and others), and consequently how to value them, but if s/he is not interested in pie or if pie is impossible if s/he has nay five eggs, then we’re dealing with different things. What matters from the point of view of the individual chooser-actor (and therefore to the economist) is the purpose and therefore the intended use.
When we talk about diminishing marginal utility, it matters not if we’re talking about only eggs or an egg, a bowl of cereal, and an apple – what matters is whether the user considers them perfect substitutes as means toward a certain end (nutrition until lunch, in the case of breakfast). If we keep this in mind, then it becomes obvious that an individual may consider seemingly very different products as substitutes and, therefore, the same economic good. It also clarifies the argument for diminishing marginal utility, since it is fairly obvious that a person would try to get the highest possible value out of something: a hungry person would choose to use a first egg for breakfast, a second for something less valuable.
It makes no sense to use one egg toward an end that is not most highly valued. In fact, the reason it is valued is because of the value we intend to use it toward. Its value is derived from the intentioned end. So if we have three eggs and happen to drop ne so that it is unusable, it does not matter to us if we had picked that particular one for the most highly valued end – we just rearrange the eggs’ uses. As long as we consider them full substitutes, we’ll use them as we see fit (which means we’ll automatically “maximize” the utility). So losing one means we forego (lose) the least valued of the ends we had considered using the eggs for. We are unable to choose otherwise.
As the value of a means (egg) is subjectively held and derived from the intended use, all economic good have diminishing marginal utility. We’re not talking about adding “one particular egg” (that could be different and perhaps look more pleasing) but adding one economic good that we consider fully substitutable. It necessarily follows that adding to our stock means they will be of lesser and lesser value – and vice versa. Diminishing marginal utility may sound difficult (it consists of three fancy economics terms), but it is really quite obvious. If we think like economists.
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