<P> The labor theory of value has lost popularity in mainstream economics and has been replaced by the theory of marginal utility . </P> <P> The theory of marginal utility, which is based on the subjective theory of value, says that the price at which an object trades in the market is determined neither by how much labor was exerted in its production, as in the labor theory of value, nor on how useful it is on the whole . Rather, its price is determined by its marginal utility . The marginal utility of a good is derived from its most important use to a person . So, if someone possesses a good, he will use it to satisfy some need or want . Which one? Naturally, the one that takes highest - priority . Eugen von Böhm - Bawerk illustrated this with the example of a farmer having five sacks of grain . </P> <P> With the first, he will make bread to survive . With the second, he will make more bread, in order to be strong enough to work . With the next, he will feed his farm animals . The next is used to make whisky, and the last one he feeds to the pigeons . If one of those bags is stolen, he will not reduce each of those activities by one - fifth; instead he will stop feeding the pigeons . </P> <P> So the value of the fifth bag of grain is equal to the satisfaction he gets from feeding the pigeons . If he sells that bag and neglects the pigeons, his least productive use of the remaining grain is to make whisky, so the value of a fourth bag of grain is the value of his whisky . Only if he loses four bags of grain will he start eating less; that is the most productive use of his grain . The last bag of grain is worth his life . </P>

Why are some necessities such as water cheaper than luxuries like diamonds