Marginal utility

Glossary definition: The value of the last (marginal) unit of a supply of a good, as the acting individual appraises it; it falls as the supply increases. It is not a measured quantity: the individual does not add up units of utility but ranks the uses that a unit of the supply would serve, and gives up the least important of them first.

In plain words

We do not value “water” or “bread” in general, but a definite quantity at our disposal. The value of one unit of a supply is the value of the least important use we would give up if we lost it; that is its marginal utility.

The more units we have, the less urgent the uses the last one serves, and the lower its value: the law of diminishing marginal utility.

An example

Someone has five buckets of water: he drinks the first, cooks with the second, washes with the third, gives the fourth to his animals and the fifth to his flowers. If he loses one bucket, he does not stop drinking; he leaves the flowers unwatered. That is why water, where it is plentiful, has a low price, while diamonds, which are scarce, have a high one.

The Austrian viewCarl Menger set out the theory in 1871, at the same time as Jevons and Walras; Friedrich von Wieser coined the term Grenznutzen. For the Austrian School utility is not measured or added up: a person ranks uses in order of preference. Marginal analysis solved the “paradox of value” that the classical economists could not explain, and grounded the subjective theory of value.

In the original“When faced with the problem of the value to be attached to one unit of a homogeneous supply, man decides on the basis of the value of the least important use he makes of the units of the whole supply; he decides on the basis of marginal utility.”

Ludwig von Mises, Human Action, ch. VII, §1 “The Law of Marginal Utility” · mises.org ↗

Definitions are from the site’s Glossary; the examples and the “Austrian view” are Praxeologos’s reading. Links to outside sources open in a new tab.