What Is Gossen's 3rd Law?
Gossen's 3rd law, also known as the Law of Scarcity or the Law of Positive Economic Value, posits that for a good or service to possess economic value, its supply must be less than the demand for it, meaning it must be scarce. In the broader field of microeconomics and consumer theory, this principle highlights that an item only holds value if it is not so abundant that consumers are entirely satiated. If a good is available in such quantities that its consumption provides zero or negative marginal utility for additional units, then it lacks economic value according to Gossen's 3rd law. This foundational concept underpins how individuals make rational choice theory decisions regarding consumption and how markets function.
History and Origin
Gossen's 3rd law is one of three fundamental economic principles articulated by Hermann Heinrich Gossen, a German economist who published his seminal work, Entwickelung der Gesetze des menschlichen Verkehrs und der daraus fließenden Regeln für menschliches Handeln (The Development of the Laws of Human Exchange and the Consequent Rules of Human Action), in 1854. G7, 8ossen's ideas, including Gossen's 3rd law, were revolutionary for their time, shifting economic thought from an objective cost-of-production perspective to one centered on the subjective value of goods and services to individuals.
6Despite the profound nature of his insights, Gossen's work was largely overlooked during his lifetime, and he reportedly died a disappointed man, having withdrawn unsold copies of his book from the publisher. I4, 5t was only in the late 1870s, after the independent development of similar theories by other economists such as William Stanley Jevons, Carl Menger, and Léon Walras—key figures in the Marginal Revolution—that Gossen's contributions, including Gossen's 3rd law, gained recognition.
Ke3y Takeaways
- Gossen's 3rd law states that a good or service must be scarce to have economic value.
- It implies that if supply meets or exceeds the quantity needed for complete consumer satisfaction, the good's economic value becomes zero.
- This principle forms a basis for understanding economic value and the factors that drive demand.
- Gossen's 3rd law is a foundational concept within classical microeconomics.
Interpreting Gossen's 3rd Law
Interpreting Gossen's 3rd law involves understanding that value is not inherent in a good itself but arises from its relationship to human wants and its availability. If a good is so abundant that every individual can have as much of it as they desire without effort or cost, then there is no incentive to exchange anything for it. For instance, air, while essential for life, typically holds no economic value because it is freely available and not scarce in most contexts. However, in specialized situations, such as inside a submarine or in outer space, breathable air becomes scarce and thus acquires significant economic value. This highlights how the context of scarcity directly influences whether something commands a price or is considered an economic good.
Hypothetical Example
Consider a remote island community where fresh water is plentiful due to abundant rainfall and easily accessible springs. In this scenario, fresh water holds immense utility for survival, but according to Gossen's 3rd law, it would have no economic value. This is because its supply far exceeds the community's demand, and individuals can satisfy their need for water without any economic exchange or effort.
However, imagine a prolonged drought hits the island. The springs dry up, and rainfall becomes negligible. Fresh water, once abundant, becomes severely scarce. Suddenly, each liter of water acquires significant economic value. The community might establish a system of exchange, perhaps trading fish or labor for water, demonstrating how the shift from abundance to scarcity creates economic value, as predicted by Gossen's 3rd law.
Practical Applications
Gossen's 3rd law, by emphasizing the role of scarcity in determining economic value, has several practical applications in economics and business:
- Pricing Strategies: Businesses implicitly recognize Gossen's 3rd law when setting prices. Products that are unique, limited in production, or difficult to obtain command higher prices because their scarcity enhances their perceived value. Conversely, common goods with abundant supply tend to have lower prices.
- Resource Allocation: The principle helps explain why societies prioritize the allocation of scarce resources. Governments and industries direct efforts towards managing and distributing items that are not freely available, as these are the resources that hold economic value and contribute to wealth.
- Understanding Market Dynamics: Gossen's 3rd law is a fundamental component of the supply and demand framework. For a demand curve to exist for a product, there must be some degree of scarcity, otherwise, there would be no price mechanism or incentive for exchange. The Federal Reserve Bank of St. Louis provides extensive educational resources on how scarcity drives economic principles.
- 2Environmental Economics: In discussions around environmental goods like clean air or biodiversity, Gossen's 3rd law becomes particularly relevant. As these once seemingly abundant resources become increasingly scarce due to pollution or habitat loss, their economic value and the need for their careful management become apparent.
Limitations and Criticisms
While Gossen's 3rd law provides a fundamental insight into the origins of economic value, it has certain limitations. One critique is that it primarily focuses on the condition of scarcity for value to exist, but it does not fully elaborate on the degree of value or how it is precisely measured. The concept of marginal utility further refines this by explaining how the value derived from additional units of a good diminishes, even if the good remains scarce overall.
Furthermore, Gossen's 3rd law, like much of classical economic theory, operates under the assumption of perfect information and rational choice theory by consumers. In reality, factors like advertising, habit, or behavioral economics biases can influence demand and perceived value even for goods that may not be inherently scarce in a purely physical sense. For instance, the perceived value of luxury goods often includes factors beyond mere scarcity, such as brand prestige or social status, which Gossen's 3rd law alone does not fully encompass.
Gossen's 3rd Law vs. Law of Equi-Marginal Utility
Gossen's 3rd law establishes scarcity as a precondition for economic value, stating that a good must be in limited supply relative to demand to have any value. It answers the question of why something has value.
In contrast, the Law of Equi-Marginal Utility, also known as Gossen's Second Law, deals with how consumers maximize their total satisfaction given their limited income. This law states that a consumer will allocate their budget across various goods and services such that the marginal utility derived from the last unit of money spent on each good is equal. While Gossen's 3rd law sets the stage for what can be valued, the Law of Equi-Marginal Utility explains the optimal way to engage in utility maximization by distributing expenditures among those valued goods. Both laws are integral to understanding consumer behavior within microeconomics, but they address different aspects of economic decision-making.
FAQs
What are Gossen's three laws?
Gossen's three laws are: 1) The Law of Diminishing Marginal Utility (Gossen's First Law), which states that the additional satisfaction from consuming successive units of a good decreases. 2) The Law of Equi-Marginal Utility (Gossen's Second Law), which explains how consumers allocate resources to maximize total utility by equalizing marginal utility per unit of currency across goods. 3) Gossen's 3rd law (Law of Scarcity), which asserts that scarcity is a prerequisite for a good to possess economic value.
D1oes Gossen's 3rd law imply that abundant goods have no utility?
No, Gossen's 3rd law does not imply that abundant goods have no utility. It distinguishes between utility and economic value. Goods like air or sunlight have immense utility for human life, but they generally lack economic value because they are not scarce. Gossen's 3rd law states that for something to be an economic good and command a price in the market, its supply must be limited relative to demand.
How does Gossen's 3rd law relate to prices?
Gossen's 3rd law is intrinsically linked to prices because prices arise from the interplay of supply and demand for scarce goods. If a good is not scarce, its effective price would be zero because there would be no competition or incentive to pay for it. Therefore, scarcity, as highlighted by Gossen's 3rd law, is a fundamental condition for the establishment of a price for an item in a market equilibrium.