Marginalism

Marginalism

Marginalism is a theory in economics that helps explain why some things cost more than others. It focuses on the idea of marginal utility, which means the extra happiness you get from having one more of something.

For example, diamonds are more expensive than water because an extra diamond gives more happiness than an extra glass of water, even though water is very useful.

The idea of marginalism was developed by economists like Carl Menger, William Stanely Jevons, and Leon Walras. They used it to solve a puzzle called the Diamond-Water Paradox, which was first pointed out by Adam Smith. This puzzle asks why diamonds cost more than water when water is needed to survive.

Later economists, like Alfred Marshall, also looked at how much more can be made to explain costs, using the idea of marginal physical productivity. Over time, marginalism became an important part of mainstream economic theory. It helps us understand how prices are set in markets today.

Main concepts

Marginalism is a way of thinking in economics that helps explain why some things cost more than others. It looks at the "marginal utility" — how much extra happiness or satisfaction one more unit of something gives us. For example, the first glass of water might be very satisfying, but by the time you drink your fifth glass, it’s not as special. This idea helps explain why diamonds, which people want only a little extra satisfaction from, cost much more than water, which we need a lot of but get less extra satisfaction from each additional glass.

In simple terms, marginalism says that prices are based on how much extra value people get from the next unit of something. It looks at small changes — like adding or taking away one more item — to understand bigger economic choices. This way of thinking helps us understand how people make decisions every day about what to buy and use.

Application to price theory

Main article: Paradox of value

Marginalism helps us understand how prices are set. It looks at the extra happiness people feel when they buy or sell things. When people buy more of something, they often want less of it as the price goes up. This is because each extra item gives them less extra happiness than the one before.

One famous example is why diamonds cost more than water. We need water to live, but it is so common that getting one more gallon doesn’t change much. Diamonds are rare, so getting one more makes a big difference to someone who wants it. This idea of extra value from one more item helps explain prices in many markets.

History

The history of marginalism shows how economists developed ideas about value over time. Early thoughts on value and usefulness go back to Aristotle. He suggested that having too much of something can make it less useful. During the 1700s and 1800s, economists like Antonio Genovesi, Pietro Verri, and Anne Robert Jacques Turgot studied how usefulness and scarcity affect value.

In the 18th century, Daniel Bernoulli and Gabriel Cramer introduced ideas about how the happiness from extra money decreases as you have more. Their work was later expanded by economists such as William Forster Lloyd, Nassau William Senior, and Jules Dupuit. A big step happened in the 19th century with Hermann Heinrich Gossen. He studied how satisfaction from extra goods affects market behavior.

The formal theory of marginalism began in the late 19th century with the work of William Stanley Jevons in England, Carl Menger in Austria, and Léon Walras in Switzerland. They changed the focus from how much it costs to make something to how much satisfaction consumers get from it. This explains why some items cost more than others based on this satisfaction.

Criticism

Marxist criticism of marginalism

Main article: Marxist economic theory

Karl Marx died before marginalism became popular in economics. His ideas were based on the labor theory of value. This theory looks at how much work goes into making something to decide its worth. Marx thought that supply and demand didn’t fully explain prices.

Later critics from Marx’s ideas said that marginalism didn’t pay enough attention to how things are made. They said it couldn’t clearly explain why prices stay the same for long periods.

Marxist adaptations to marginalism

Some economists inspired by Marx tried to mix his ideas with marginalism and other economic theories. They thought Marx didn’t have enough detail about prices, and other theories didn’t explain the bigger social picture. Some believe that Marx’s and marginalism’s ideas can work together in certain ways.