Why do individuals pay much higher prices for some goods versus other goods? The common reply to this is the law of supply and demand.
However, what is behind this law? To provide an answer to this question economists refer to the law of diminishing marginal utility.
Mainstream economics explains the law of diminishing marginal utility in terms of the satisfaction that one derives from consuming a particular good.
For instance, an individual may derive vast satisfaction from consuming one cone of ice cream.
However, the satisfaction he will derive from consuming a second cone might also be big but not as big as the satisfaction derived from the first cone.
The satisfaction from the consumption of a third cone is likely to diminish further, and so on.
From this, mainstream economics concludes that the more of any good we consume in a given period, the less satisfaction, or utility, we derive out of each additional, or marginal, unit.
It is also established that because the marginal utility of a good declines as we consume more and more of it, the price that we are willing to pay per unit of the good also declines.
Utility in this way of thinking is presented as a certain quantity that increases at a diminishing rate as one consumes more of a particular good. Utility is regarded as a feeling of satisfaction or enjoyment derived from buying or using goods and services.
According to the mainstream way of thinking, an individual’s utility scale is wired in his head. This scale determines for the individual whether he will purchase a particular good. The valuation scale is given and there is no explanation on how it was established.
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