Gossens_first_law

What Is Gossen's First Law?

Gossen's First Law, also known as the law of diminishing marginal utility, is a fundamental concept within microeconomics that describes the decreasing satisfaction or utility a consumer derives from each additional unit of a good or service consumed. Utility, in economics, represents the satisfaction or happiness an individual gains from consuming a good or service¹⁸. This law suggests that as an individual consumes more of a particular item, the additional satisfaction, or marginal utility, gained from each subsequent unit tends to decrease¹⁶, ¹⁷. This principle is crucial for understanding consumer behavior and how individuals make choices under conditions of scarcity.

History and Origin

Gossen's First Law is named after Hermann Heinrich Gossen (1810-1858), a German economist who published his work, "Entwickelung der Gesetze des menschlichen Verkehrs" (Development of the Laws of Human Intercourse, and of the Rules of Human Action Derived Therefrom), in 1854. Gossen, a Prussian civil servant by training, was one of the first to elaborate a detailed theory of marginal utility, anticipating the Marginalist Revolution that occurred much later¹³, ¹⁴, ¹⁵. His work was initially largely overlooked, partly due to its dense, mathematical style and the prevailing influence of the German Historical School of economics at the time¹². It was only much later that his contributions were recognized, particularly by economists like William Stanley Jevons, Carl Menger, and Léon Walras, who independently developed similar ideas.¹⁰, ¹¹ Gossen's pioneering articulation of diminishing marginal utility laid a groundwork for modern utility maximization theory and rational choice theory.

Key Takeaways

• Gossen's First Law states that as consumption of a good increases, the additional satisfaction (marginal utility) derived from each successive unit decreases.
• It is a core principle in microeconomics, explaining aspects of consumer behavior and demand.
• This law helps explain the downward slope of a demand curve.
• It forms the basis for understanding how consumers allocate their resources to maximize overall satisfaction, given their budget constraint.
• While foundational, it relies on assumptions about consumer rationality and the measurability of utility.

Formula and Calculation

Gossen's First Law is a descriptive principle rather than a formula that yields a specific numerical outcome. However, it can be represented mathematically through the concept of marginal utility. If (TU) represents total utility from consuming (Q) units of a good, then marginal utility ((MU)) is the change in total utility resulting from consuming one additional unit.

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

According to Gossen's First Law, as (Q) increases, (MU) decreases. For example, if the total utility derived from consuming (Q) units is (TU(Q)), then the marginal utility of the (n)-th unit is:

$MU_n = TU(n) - TU(n-1)$

This mathematical interpretation illustrates that the utility function, while generally upward-sloping (more is better), becomes flatter with increased consumption, reflecting the diminishing additional satisfaction.⁹

Interpreting Gossen's First Law

Interpreting Gossen's First Law involves understanding how consumer satisfaction changes with increased consumption of a single good. The law suggests that the initial units of a good consumed will provide a high level of satisfaction because they address a more pressing need or desire. As more units are consumed, the intensity of that need diminishes, and consequently, each additional unit contributes less to overall satisfaction. For instance, the first slice of pizza to a hungry person provides immense satisfaction, but the tenth slice might provide very little, or even negative, satisfaction. This principle is fundamental to why consumers diversify their purchases rather than concentrating all their spending on a single item, even if it is highly valued initially. It also helps explain the shape of the indifference curve, which illustrates combinations of goods that yield the same level of utility.

Hypothetical Example

Consider Sarah, who loves to drink coffee.

1. First cup of coffee: Sarah is very tired in the morning. Her first cup of coffee provides a significant boost, making her feel awake and alert. She derives a high level of satisfaction from this first cup.
2. Second cup of coffee: She still enjoys a second cup, but the additional boost she gets isn't as pronounced as the first. The marginal utility from the second cup is positive, but less than that of the first.
3. Third cup of coffee: Sarah drinks a third cup. By now, she's fully awake, and the additional satisfaction is minimal. She might even start to feel a bit jittery. The marginal utility has diminished further.
4. Fourth cup of coffee: If Sarah were to drink a fourth cup, she might experience negative effects like anxiety or an upset stomach. At this point, the marginal utility becomes negative, indicating that consuming another unit actually decreases her total utility.

This example illustrates Gossen's First Law, showing how the satisfaction derived from each additional unit of coffee decreases as Sarah's consumption increases. This diminishing satisfaction influences her future coffee consumption and other spending decisions.

Practical Applications

Gossen's First Law has several practical applications in economics and business, particularly in understanding market demand and pricing strategies. Businesses can use this principle to inform their pricing models, recognizing that consumers are willing to pay less for additional units of a product as their satisfaction from those units declines. For example, bulk discounts often reflect this law, as consumers are offered a lower per-unit price for larger quantities, acknowledging the decreasing marginal utility of additional units.

Furthermore, the law helps explain the concept of consumer surplus, which is the difference between what consumers are willing to pay for a good and what they actually pay. The diminishing marginal utility means consumers are willing to pay a higher price for the first unit of a good (due to high utility) than for subsequent units. This also impacts economic policies aimed at understanding household spending patterns. Research by the Federal Reserve, for example, frequently analyzes consumer spending to gauge economic health, and Gossen's First Law underpins some of the behavioral assumptions in these analyses.⁸ The Federal Reserve Bank of San Francisco provides ongoing research and data on consumer spending that reflects these underlying economic principles.⁷

Limitations and Criticisms

Despite its foundational role, Gossen's First Law, like many economic theories, has limitations and faces criticisms. One primary criticism stems from the challenge of quantitatively measuring utility, which is subjective and varies greatly among individuals.⁵, ⁶ While the law provides a conceptual framework, assigning precise numerical values to satisfaction is often impractical in real-world scenarios.

Another limitation is the assumption of rational choice theory, which posits that consumers always make decisions to maximize their utility. In reality, factors such as emotional influences, cognitive biases, incomplete information, and social norms can lead to decisions that do not perfectly align with utility maximization.⁴ For example, impulse purchases or brand loyalty might lead consumers to buy items that do not offer the highest marginal utility per dollar spent. Modern behavioral economics specifically explores these deviations from purely rational behavior. The principle also assumes that units of a good are homogeneous and consumed in quick succession, which may not always be the case.³ OpenStax's "Principles of Economics" discusses how simplifying assumptions are made in economic models, which can be seen as limitations when applying theories like diminishing marginal utility to complex real-world situations.²

Gossen's First Law vs. Gossen's Second Law

Gossen's First Law and Gossen's Second Law are both fundamental concepts developed by Hermann Heinrich Gossen, but they address different aspects of consumer choice.

• Gossen's First Law (Law of Diminishing Marginal Utility): This law focuses on a single good and states that as an individual consumes more units of that good, the additional satisfaction (marginal utility) derived from each successive unit decreases. It explains why the demand curve for a single good slopes downward.
• Gossen's Second Law (Law of Equimarginal Utility): This law extends the first by considering multiple goods. It states that to maximize total utility, a consumer should allocate their spending so that the last dollar spent on each good yields the same amount of marginal utility. In essence, it describes how a consumer distributes their limited income across various goods and services to achieve the highest possible overall satisfaction. This law is critical for understanding economic equilibrium in consumer choice and relates directly to the optimal allocation of resources.

The key difference lies in scope: the First Law describes the diminishing utility of consuming one more unit of a single good, while the Second Law describes how to optimally combine different goods to maximize utility given a budget.

FAQs

What does "utility" mean in economics?

In economics, "utility" refers to the satisfaction, happiness, or benefit that a consumer derives from consuming a good or service. It is a measure of preference over a set of goods and services.¹

Why is Gossen's First Law important?

Gossen's First Law is important because it helps explain fundamental aspects of consumer behavior, such as why people diversify their consumption, why demand curves are typically downward sloping, and how consumers make choices given their limited resources. It lays the groundwork for understanding concepts like price elasticity of demand and consumer surplus.

Does Gossen's First Law apply to all goods and services?

Gossen's First Law is generally considered applicable to most goods and services. However, there are theoretical exceptions, such as addictive substances where marginal utility might initially increase, or collectors' items where the utility of additional units might not diminish in the typical sense. Nonetheless, for the vast majority of consumption decisions, the principle holds true.

How does this law relate to everyday spending?

In everyday spending, Gossen's First Law is evident when you choose to buy a variety of items rather than many units of just one. For example, after eating one pizza slice, you might still want another, but perhaps less intensely. After several slices, you might prefer a dessert or a drink, as the marginal utility from more pizza has diminished significantly. This continuous evaluation of diminishing satisfaction guides daily purchasing decisions.