Travelling Soldier

Source: Hindu Business Line

My friend’s daughter loves yoghurt. The other day, when she refused to have dinner and demanded only yoghurt, my friend and his wife decided to give her enough and more of her favourite food.

The little one was delighted and, perhaps, surprised that her parents were allowing her to have just yoghurt. But she was unable to have more than three heaped spoons. That was, perhaps, her parents’ idea — to stuff her so much with yoghurt that she would finally give up having her favourite food.

Without their realising it, my friend and his wife were employing an important principle in economics — marginal utility.

Suppose you like ice-cream. You decide to binge on a Saturday night. After four ice-creams, you feel you cannot have any more. Why? Apart from feeling full, the satisfaction that you derive from having ice-creams may have also come down.

You would have derived immense satisfaction from your first ice-cream. The second would have been good too. The third less while you struggle to complete the fourth. This is because your satisfaction from consuming each additional ice-cream comes down.

The satisfaction derived from each additional unit is called marginal utility in economics. The principle that captures the decreasing satisfaction from each additional unit consumed is called the law of diminishing marginal utility. The concept was first formulated in the 1850s by H. H. Gossen and was later independently developed by William Jevons, Carl Menger and Leon Walras.

It was, however, Friedrich Von Wieser of the Austrian School of Economics who coined the term “marginal utility.”