114
YOU ENJOY THE LAST
CHOCOLATE LESS
THAN THE FIRST
UTILITY AND SATISFACTION
A
ristotle was the first
person to observe that too
much of a useful thing
would be no use. The idea that
the more we consume of a product,
the smaller the increases in
satisfaction we receive has become
enshrined in economic theory as
the law of diminishing marginal
utility (DMU). Marginal refers to
changes on the “border,” such as
eating one more chocolate. Utility is
the “pleasure or pain” in the
decision to consume. In his Theory
of Political Economy (1871), British
economist William Jevons showed
that utility could be measured in a
way that relates to the quantity of
the commodity available.Demand curves
The concept of DMU became more
important as economists struggled
to understand what determines the
price of commodities. If everyone
generally agrees that each extra
chocolate adds less utility, then it
makes sense that we will only
demand extra chocolates if the
price falls, because additional
chocolates will give less pleasure—
so we will only buy them if they
cost less. The resulting demand is
negatively related to price, and this,Demand is inversely
related to price: it increases
when the price falls.... each extra unit consumed
gives less pleasure than the
previous one; for example...This means that consumers
will only buy more of a good
if the price falls because...... you enjoy the last
chocolate less than
the first.IN CONTEXT
FOCUS
Theories of valueKEY THINKER
William Jevons (1835 –82)BEFORE
1871 Austrian economist Carl
Menger is credited with the
theory of diminishing
marginal utility in his book
Principles of Economics.AFTER
1890 US economist Alfred
Marshall creates the demand
curve using marginal utilities
in his Principles of Economics.1944 US economists John
von Neumann and Oskar
Morgenstern extend utility
theory to situations with
uncertain outcomes.1953 In The Behavior of
Rational Man at Risk, French
economist Maurice Allais
demonstrates how people
behave differently from the
way utility theory predicts.