Marginal Utility
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Marginal Utility
Marginal theory has been one of the most influential theories in economies in illustrating the relationship between consumer satisfaction and consumption of goods and services. Utility has been termed as the level of satisfaction that is accrued from the satisfaction of goods and services. Stanley Jevons, Leon Walras, and Carl Menger simultaneously made individual discoveries and contributions to the marginal utility theory and have been termed as founders of the “marginal revolution”. Marginal utility has been defined as the overall change in total utility because of one unit change in the rate of consumption of a good or service at a given time. Additionally the theory notes that the utility or benefit is inversely relative to the number of units already owned by the individual.
Leon Walras individually developed the theory of marginal utility with his biggest contribution being the theory of general equilibrium. Before Walras developed the theory of marginal utility there were minimal attempts by economists to illustrate the functionality of consumerism and the achievement of equilibrium in a market. In his study, he developed a hypothetical economy using equations that were equated to the number of unknowns to derive the equilibrium quantities and prices. This is considered as among one of the greatest contributions made by Walras in the field of science. In his studies, he covered a variety of topics that was aimed at revealing of the utility theory. This included the illustrations of the nature of exchanges of two commodities for one another (Walras, 2010). Walras’ theory was developed divergently from the versions of Jevons, and Menger, given that he described the exchange of commodities as reliant on a process he termed as “Tâtonnement” or groping in English. He assumed that prices grope towards equilibrium to result in actual exchange of commodities in a market.
Some of the considerations of the analysis included the exchange of two commodities to other commodities, expansion of the economic system to include production, credit, capital formation money and circulation of commodities. He described his works as largely focused on exchange of commodities in a perfect competition market with commodities being obtained at a similar rate of exchange in the entire market. In his model, he notes that rarete can be identified with consumer satisfaction based on welfare purposes. His work was different from other economists in that he held the idea that all demands in a market are relative to a set of relationships (Walras, 2010).
Stanley Jevons was among the three individuals who were responsible for the marginal revolution. The value of a good or service is entirely dependent on utility or satisfaction. In addition, the similarity of his theory to those developed by Walras and Menger was the relativity of utility to the units of goods or service already consumed by an individual. Jevons’ view diverged from the works of his predecessors and other economists such as Walras and Menger given that it was influential towards the departure from the theories of value. Classical theories of value held that value is accrued from the labor that is applied on the production of a good or service or the cost of production in general (Maas, 2005).
Jevons enhanced the study on the equations of exchange. The equations of exchange provide that, in order for a consumer to maximize satisfaction or utility, the ratio applied for the marginal utility of a product or service must be equal to its price. The theorems developed by this group of economists were essential in elucidating the paradox of value. It sought to understand the reality of price in an economy with respect to pricing of different items in an economy. In addition, other divergences in his work include a varied theoretical framework. His theoretical framework was less focused on production of goods and services as compared to theories developed by other economist (Maas, 2005).
He derived his theorem from separable and additive utility functions. His works attributes its success from the works of Johann H. von Thünen who was the first economist to derive the term marginal. He provided that utility amounted to “a circumstance of things arising out of their relation to man’s requirements” (Maas, 2005). This means that the specific quantity of a commodity has different utilities to various people. In addition, as the quantity of a commodity increases its level of utility declines gradually until the user does not need the commodity.
His works also included a differentiation of marginal utility and total utility. He termed marginal utility as “the final degree of utility,” (Maas, 2005). He continued to define it as “the degree of utility of the last addition, or the next possible addition of a very small, or infinitely small, quantity to the existing stock” (Maas, 2005). This concept is largely used in differential calculus and is the differential coefficient of utility relative to quantity of a commodity. He further defined maximum total utility is evident when that highest degree of utility are equal in all aspects of using a commodity. He applied diagrams and equations that are marked by quantities of commodities on the x-axis and utility on the y-axis. The region under the curve is a representation of total utility achieved by a consumer using a given product.
Carl Menger was a distinct economist. He is termed as the father of Austrian economics and a founder of the marginal utility revolution. He worked separately from other economists and arrived to similar conclusions on marginal utility such as those developed by Walras and Jevons. Menger did not share Jevons’ belief in units of utility in consumption of goods and services. However, he noted that goods and services are valuable given that they provide avenues to satisfy needs and wants, which may differ from one good or service to another (Hagemann, Ikeda, & Nishizawa, 2010).
He used his theorem to provide a solution to the diamond-water paradox that had baffled other economists such as Adam Smith. In addition, his work also disputed the labor theory of value that had been developed by his predecessors. He noted that goods and services attract their respective values based on the abilities to satisfy needs and wants of consumers as opposed to the labor costs of producing such goods or services. In addition, he provided that the value of labor for producing goods and services was derived from the needs of the consumers and the ability of such products or services to satisfy consumer needs. This has been termed as the theory of derived demand (Hagemann, Ikeda, & Nishizawa, 2010).
Using the subjective theory of value, he arrived at one of the most important insights in the world of economics. His works was different from the works developed by Walras and Jevons in that he noted that all sides in exchange gain in one way or another. Additionally exchange benefits both parties involved in exchange with money being the major medium of exchange in modern markets. Exchange usually involves the provision of goods and services with an aim of gaining from the commodities involved in the exchange for both parties involved in the activity. He notes that money has become an important medium for exchange given that it provides parties involved in exchange with items essential to satisfy their respective wants or needs (Hagemann, Ikeda, & Nishizawa, 2010). Money is widely accepted as a general form of exchange and enables parties to purchase other goods and services that they deem essential to satisfy their needs and wants.
His works has been termed as deductive in nature that sought to explain economic expansion under capitalistic conditions. In addition, his works has been termed by contemporary economists as neoclassical individualist economics. This is because it was based on the consumer utility theorems of value as expressed in Austrian theorems of value and cost. It is also explained under marginal productivity theory of distribution. This illustrates the extent of Menger’s works in the field of economics (Hagemann, Ikeda, & Nishizawa, 2010).
The theory of marginal utility replaced the labor theory of value. Consumers had similar approaches in satisfying their needs; an additional unit is relative to the goods or services already in hand. The three founders of marginal utility theory of economics Stanley Jevons, Leon Walras, Carl Menger provided an influential step for the world to understand marginal utility as a theorem. The theorem has been essential in explaining the demand for some commodities consumed in contemporary markets such as provided in the diamond-water paradox.
References:
Hagemann, H., Ikeda, Y., & Nishizawa, T. (2010). Austrian economics in transition: From Carl Menger to Friedrich Hayek. New York: Palgrave Macmillan.
Walras, L. (2010). Studies in social economics. Abingdon, Oxon: Routledge.
Maas, H. (2005). William Stanley Jevons and the making of modern economics. Cambridge, UK: Cambridge University Press.