Final utility
Final Utility is the
For example, if we lost a unit of a good, the value of the loss would be the value of the least important use of the good. This last good, which represents its final utility, was being applied to our least important wants. In the case of the lost good, it is replaced and the value to which we can assign the loss is not the value of the first most important use of the good, but the least important—what we call the final utility.[1]
According to the law of marginal utility, the value of each good in a stock of identical goods is utility of the last and most easily dispensable unit.[2] That is why price is said to be determined by supply and demand: the price reflects the (approximate and average) value of the good, but most closely reflects the value of the last use. If there is a shortage of supply, the good will cease being applied to its least important uses. All else being equal, the price will increase and the increase in price represents, so to speak, the value we attribute to the new last use. Before, with a larger supply, the last use was of less value to us. With a smaller supply the value of the last use is necessarily more important because we always satisfy our more important wants first. Therefore, the increase in price can be seen as a reflection of the increase in value we attribute to the last use of the supply.
Ludwig von Mises writes:
"When face with the problem of the value to be attached to one unit of a homogeneous supply, man decides on the basis of the value of the least important use he makes of the units of the whole supply; he decides on the basis of marginal utility."[3]
Example
If a hurricane struck Florida and there was a shortage of water, everything else equal, the
A supply of a good will be applied to most important wants first and least important wants last. When there is a shortage, all else being equal, the price increases. The smaller supply is being used for the most important wants, but is not being used for the least important wants. In this sense, we can say the increase in price represents the increase in value which the last unit of the supply is filling. Before water cost very little and was used for washing and watering plants. Now, since there is not enough for washing and watering plants and it is instead being used exclusively to drink and cook—the value we attribute to those activities is, in a sense, communicated through the higher price. The price reflects that importance of the last use of a supply—and in this case the supply was truncated to only allow for the more important uses.
Final utility is the logical conclusion of marginal utility and a corner stone of price theory.
See also
- Austrian School of Economics
- Law of Marginal Utility
References
- Böhm-Bawerk, Eugen von. "The Law of Final Utility - Eugen von Böhm-Bawerk - Mises Daily ." The Ludwig von Mises Institute . http://mises.org/daily/4637(accessed April 29, 2011).
- ^ von Böhm-Bawerk, Eugen, trans. George Reisman. "Eugen von Böhm-Bawerk’s “Value, Cost, and Marginal Utility”." Ludwig von Mises Institute. mises.org/pdf/asc/2002/asc8-reisman.pdf (accessed April 30, 2011).
- ^ Ludwig von Mises. VII. Action Within The World, 1. The Law of Marginal Utility, Human Action, online version, referenced 2011-04-30.