Gossen’s Law Explained
The Gossen Law was given by Hermann Heinrich Gossen, a German economist to explain his general observations of human consumption. To support his observations, he proposed two hypothesizes which later got converted into a law.
It is also known as the ‘Law of Diminishing Marginal Utility’. The law of diminishing marginal utility states that the utility derived from each successive unit of a commodity diminishes. To put it simply, even the most beautiful place in the world or the sweetest music can make you feel bored after a certain stage. The law further states that when an individual consumes more of a commodity the total utility increases at a decreasing rate. However, after a certain stage, the total utility also starts decreasing and the marginal utility becomes negative. This means that the individual does not need the commodity further.
- For Example:
Suppose that you are hungry and plan to have some apples. Since you are hungry, the first apple provides you with great amount of utility. The utility derived from the second apple is certainly less than that of the first one. Similarly, the utility derived from the third apple is lesser than that of the second one; the fourth apple yields you less utility than the third one and so on. After certain stage of consumption, the utility derived becomes zero and beyond this stage, the utility derived becomes negative. This is because of the reason that you are getting satiated as you consume more and more apples.
When the utility becomes zero, it means that the consumer is not in need of the commodity any further.
2. Assumptions of the Law:
The assumptions include:
- The law of diminishing marginal utility assumes that the consumer’s consumption pattern, tastes, preferences, income, and price of the commodity and its substitutes are constant during the process of consumption.
- Each unit of the commodity under consideration is identical in all aspects such as quality, taste, color, size, and so on.
- Each unit of commodity under consideration must be the same and standard.
- The law further assumes that consumption is a continuous process and there is no room for any time gap.
- Finally, for the law to hold well, the consumer must be a rational economic man. In addition, the law assumes that the consumer’s mental condition remains normal during the process of consumption.
3. The Relationship between Total Utility (TU) and Marginal Utility (MU):
The law claims that the marginal utility diminishes as the quantity consumed increases. In some cases, the marginal utility may keep increasing in the beginning. However, a stage certainly comes at which the marginal utility starts decreasing. The law is relevant only at this decreasing part.
|Marginal Utility||Total Utility|
|1. Declines||1. Increases but at a diminishing rate|
|2. Reaches zero; and||2. Reaches maximum; and|
|3. Becomes Negative||3. Declines from the maximum|
4. What is the reason that holds the law in place?
The first reason is that human wants are satiable. Though you are an ardent lover of movies, you cannot watch an infinite number of movies. At a certain stage, one is bored with movies. Because their want is getting satiated as you watch more and more movies. This is the fundamental reason for the operation of the law of diminishing marginal utility.
Secondly, each commodity is unique in the usage. This means that commodities are not perfectly substitutes. When you are satisfied with one commodity, you switch over to another because of their unique usages. When you try out something new, the utility derived from the first unit is high and the subsequent units give you less and less utility. Therefore, the law of diminishing marginal utility operates. Had all commodities been perfectly substitutes, there would be nothing new to excite you. In this case, law of diminishing marginal utility does not operate.
5. Importance of the law:
- The Law of Diminishing Marginal Utility is the basic law of consumption. Other important laws in economics like The Law of Demand, the Law of Equimarginal Utility, and the Concept of Consumer’s Surplus are based on it.
- The law helps to explain the phenomenon in value theory that the price of a commodity falls when its supply increases. It is because, with the increase in the stock of a commodity, its marginal utility diminishes.
- The famous “diamond-water paradox” of Smith is explained with the help of this law. Because of their relative scarcity, diamonds possess high marginal utility and so a high price. Since water is relatively abundant, it possesses low marginal utility and hence low price even though its total utility is high. That is why water has a low price as compared to a diamond though it is more useful than the latter.
- The principle of progression in taxation is also based on this law. As a person’s income increases, the rate of tax rises because the marginal utility of money to him falls with the rise in his income.
- Lastly, this law underlies the socialist plea for an equitable distribution of wealth. The marginal utility of money to the rich is low. It is, therefore, advisable that their surplus wealth be acquired by the state and distributed to the poor who possess high marginal utility for money.
6. Some exceptions to the law are:
While the law mostly operates universally, there are certain circumstances, under which it fails to operate. Some of them are:
- Abnormality in individuals prevents the law from working well. For instance, misers or drunkards are considered abnormal here. Additional units of the toxic substance may yield increasing marginal utility to a drunkard. In this scenario, the law of diminishing marginal utility does not work. Want to know how alcohol affects your body?- Read this!
- Some people may involve collection rare articles such as antiques, stamps, old paintings, coins and so on. Under these circumstances also, the law of diminishing marginal utility does not hold good. Similarly, some people purchase goods such as jewels and diamonds just to display them in order to uphold their social status. In this case, the law of diminishing marginal utility does not operate properly.
- When many people start using a commodity, the utility derived from it starts increasing. For example, when you alone use a mobile phone, you may not find it much useful. If all your friends start using mobile phone, you will start using yours frequently. In this case, the utility you derive from your mobile phone start increasing, when others start using mobile phone.
7. Flaws of the Law:
The fundamental methodological flaws in Gossen’s theory include his subjective psychological, idealistic approach to economic phenomena and his disregard for production, which plays the decisive role in society’s economic life. His theory is the basis for the apologist conclusion that the character of consumption and the distribution of material wealth among people does not depend on socio-economic forms of production.
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