Gossen's 1st law: Meaning, Criticisms & Real-World Uses

What Is Gossen's 1st Law?

Gossen's 1st law, also known as the Law of Diminishing Marginal Utility, is a fundamental principle in microeconomics and utility theory within consumer behavior. This law posits that as an individual consumes successive units of a good or service, the additional satisfaction, or utility, derived from each additional unit decreases. In simpler terms, the more of something you have or consume, the less extra pleasure or benefit you get from each subsequent unit. This concept helps explain why people typically seek variety in their consumption rather than satiating themselves with just one type of good.

History and Origin

Gossen's 1st law is named after Hermann Heinrich Gossen, a German economist who published his groundbreaking work, "Development of the Laws of Human Relations, and of the Rules of Human Action Derived Therefrom" (Die Entwicklung der Gesetze des menschlichen Verkehrs, und der daraus fließenden Regeln für menschliches Handeln), in 1854. A¹⁴lthough Gossen's ideas were initially overlooked during his lifetime, he is widely recognized as a crucial forerunner of the Marginalist Revolution that transformed economic thought in the late 19th century. H¹³is work laid the theoretical groundwork for understanding consumer decision-making based on the subjective value individuals place on goods and services, particularly the diminishing nature of that value with increased consumption. Gossen's insightful contributions were recognized posthumously, particularly by later economists like William Stanley Jevons, Carl Menger, and Léon Walras, who independently developed similar concepts.

#¹²# Key Takeaways

Decreasing Satisfaction: Gossen's 1st law states that the satisfaction obtained from consuming each additional unit of a good or service diminishes.
Influences Consumer Choices: The principle explains why consumers typically diversify their spending rather than consuming a single good to the point of complete satiation.
Foundation for Demand: It is a core concept for understanding the downward-sloping demand curve, as consumers are willing to pay less for additional units due to decreasing marginal utility.
Resource Allocation: The law helps explain how individuals make optimal consumer choice decisions and manage resource allocation under budget constraints.

Formula and Calculation

Gossen's 1st law is a qualitative statement about utility rather than a strict mathematical formula to be calculated, but the underlying concept of marginal utility can be expressed. Marginal utility (MU) is the change in total utility (TU) resulting from consuming one additional unit of a good (Q).

The formula is:

$MU = \frac{\Delta TU}{\Delta Q}$

Where:

(MU) = Marginal Utility
(\Delta TU) = Change in Total Utility
(\Delta Q) = Change in Quantity Consumed (typically 1 unit)

This formula indicates that the marginal utility for a given unit is the additional satisfaction gained from consuming that unit, relative to the total satisfaction from previous consumption.

Interpreting Gossen's 1st Law

Interpreting Gossen's 1st law primarily involves understanding how it influences human economic decisions. The law suggests that individuals naturally seek to maximize their overall satisfaction by consuming a variety of goods and services, rather than an excessive amount of any single item. For instance, after eating several slices of pizza, the enjoyment from each subsequent slice diminishes. This decreasing satisfaction encourages a consumer to allocate their budget constraint to other goods that might provide greater initial utility. This behavioral pattern contributes to the idea of economic equilibrium in consumption, where consumers balance their spending to achieve optimal satisfaction across all their purchases.

Hypothetical Example

Consider a scenario involving a person's enjoyment of coffee. When the person has had no coffee all day, the first cup might provide a high level of satisfaction, perhaps rated as 10 units of utility, due to the taste and stimulating effect. This initial high utility reflects a strong desire for the good.

However, as they consume a second cup, the additional satisfaction (marginal utility) derived might decrease. They might rate the second cup as 7 units of utility because their initial craving has been partially satisfied. A third cup could provide only 3 additional units of utility, as they start to feel over-caffeinated or less interested in the taste.

By the fourth cup, the additional utility might even become negative, perhaps -2 units, indicating that consuming another cup actually makes them feel unwell or creates disutility. This hypothetical example demonstrates how the marginal utility of each successive unit of coffee diminishes, eventually leading to a point where additional consumption provides no further benefit or even becomes detrimental to total utility.

Practical Applications

Gossen's 1st law has several significant practical applications in economics and business, shaping both consumer and producer behavior. It provides a foundational explanation for the inverse relationship between price and quantity demanded, leading to the downward slope of the demand curve. As consumers gain less additional satisfaction from successive units of a good, their willingness to pay for those additional units decreases.

F¹¹or businesses, understanding Gossen's 1st law is crucial for developing effective pricing strategies. Companies often use bulk discounts or bundle offers, recognizing that the marginal utility of additional units declines. For example, buying a second item at half price leverages the diminishing marginal utility to encourage more purchases. The concept also helps explain phenomena like the diamond-water paradox, where water, essential for life, has a low price due to its abundance and low marginal utility at high consumption levels, while diamonds, though less essential, command a high price due to their scarcity and high marginal utility for their limited supply. Th¹⁰e underlying concept of utility is central to understanding consumer choices and how individuals derive satisfaction from goods and services.,,
⁹
⁸## Limitations and Criticisms

While Gossen's 1st law is a foundational concept, it is based on several assumptions that limit its universal applicability. The law assumes that consumers are rational consumers and that their tastes, preferences, and income remain constant during consumption., I⁷t⁶ also assumes that goods are divisible and that external factors do not influence utility.

Several situations are often cited as apparent exceptions or limitations:

Hobbies and Collections: For certain hobbies or collections (e.g., rare stamps, antiques), the utility derived from acquiring additional items may appear to increase rather than diminish, especially as a collection nears completion or gains significant value. Ho⁵wever, this often relates to the total utility of the collection, not necessarily the marginal utility of a single, identical item if consumed in succession.
Addictive Goods: For addictive substances or behaviors, the marginal utility might initially increase or remain constant for a period before diminishing.
⁴ Irrational Behavior: Human behavior is not always perfectly rational. Emotions, social influences, and cognitive biases can lead to consumption patterns that do not strictly follow the diminishing marginal utility principle. Th³e subjective nature of measuring utility also presents a challenge, as satisfaction is a personal experience that cannot be precisely quantified.,
*² Indivisible Goods: For goods that cannot be easily divided into smaller units (e.g., a car or a house), the concept of diminishing marginal utility from successive "units" becomes less relevant.

T¹hese limitations highlight that while Gossen's 1st law provides a powerful framework for understanding typical market dynamics and consumption, real-world complexity often introduces deviations.

Gossen's 1st Law vs. Gossen's 2nd Law

Gossen's 1st law and Gossen's 2nd law are both fundamental principles in consumer theory, but they address different aspects of utility maximization.

| Feature | Gossen's 1st Law (Law of Diminishing Marginal Utility) | Gossen's 2nd Law (Law of Equi-Marginal Utility)