Gossen Laws

economic-dictionary

Gossen's laws are three economic laws, elaborated in 1854 by the German-born economist Hermann Heinrich Gossen. These three laws are based on the consumption of the citizens of an economy, being considered a fundamental basis of marginalist theories.

At a time when William Stanley Jevons was developing the marginalist theory, authors like Gossen, in the same way, talked about what, a posteriori, would be considered as part of the elementary theories that this theory presents. Thus, Gossen's laws are three laws, based on consumption and the utility that consumers give to goods, based on marginal utility and not, as defended by the classical school, based on the labor theory of value .

Once we know what Gossen's laws are, what they were based on and what they mean for the history of the economy, let's look at the laws that this author coined in the 19th century.

Gossen Laws: 3 Laws

As we said at the beginning, Gossen's laws are 3.

In summary, the laws elaborated by the German economist are the following:

  • Gossen's 1st law: This first law developed by Gossen was that of diminishing marginal utility. In other words, a theory that shows us how the value of a good, as long as we have and consume more units of said good, the price, as well as the value of these units, is progressively reduced.

So let's imagine when we are thirsty and drink water. The first glass of water that we drink, due to our needs, has a greater utility and, therefore, a greater value. But over time, as we drink more glasses of water, the utility decreases, as does its value.

  • Gossen's 2nd law: This second law developed by Gossen was the equality of weighted marginal utilities. That is to say, we cannot satisfy all the needs until we are satisfied, since this satisfaction is the consequence of the different marginal utilities obtained from the different goods being equal.

So we are talking about a theory that addresses the maximization of resources, as well as that need to manage limited resources to satisfy unlimited needs.

  • Gossen's 3rd Law: This third and last law elaborated by Gossen was that of scarcity. In other words, we must keep in mind that scarcity is a precondition for economic value. Since, if there were no scarcity, there would be no value either.

And, as we know, scarcity determines the value of a good. The more units there are of a given good, according to Gossen, its value tends to zero.

All these theories constitute a part of the basis of marginalist theories.

Examples of Gossen's laws

In order to correctly understand the laws that Gossen describes, and in addition to the examples mentioned, some examples are described that show what, technically, these laws try to explain.

As regards the first law, that of diminishing marginal utility, what this theory tries to reflect is that we do not give the same utility to the first unit that we obtain from a good, as to the seventh, for example. Like the example of the glasses of water, we will not give the same utility to the first car we buy, as if we buy our seventh car.The seventh car, given that we have 6 more that have already covered part of our needs, will present a lower utility, and, therefore, its value, in the same way, will also be lower.

On the other hand, focusing on the second law, that of the equality of weighted marginal utilities, what Gossen tries to show us in this theory is that, in economics, the needs are unlimited, while the resources to satisfy them, as we know, they are scarce. Therefore, we must allocate resources in such a way that all needs are met to a similar degree, and not just one endlessly. Well, as we also know, we do not achieve full satisfaction by satisfying a need until we are satisfied.

Finally, the third law, to understand it better, tells us about scarcity, and the relationship that the value of goods has with this scarcity. Well, as Gossen argues, the value of a certain good is determined by the scarcity that is present. And, as we know, a very limited, luxury vehicle is not worth the same as a commercial vehicle that is manufactured on a large scale.

Tags:  accounting present latin america 

Interesting Articles

add