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 or satisfaction you get from having just one more unit of something. For example, diamonds are more expensive than water because that extra diamond gives more satisfaction than an extra glass of water, even though water is much more useful overall.

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

Later economists, following Alfred Marshall, also looked at how much extra stuff can be produced to explain costs, using the idea of marginal physical productivity. Over time, marginalism became a key part of what we call mainstream economic theory, helping 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 by looking at how much extra satisfaction or value people get from buying or selling goods. When people buy things, they usually want less as the price goes up. This is because each extra item they get gives them less extra happiness than the one before.

One famous example is why diamonds cost more than water. Even though we need water to live, it is so common that getting one more gallon doesn’t make much difference. Diamonds, on the other hand, are rare, so getting one more makes a big difference to someone who wants it. This idea of how much extra value we get 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 can be traced back to Aristotle, who 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 explored how usefulness and scarcity affect value.

In the 18th century, Daniel Bernoulli and Gabriel Cramer introduced ideas about how the satisfaction from extra amounts of 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 major step came in the 19th century with Hermann Heinrich Gossen, who deeply explored how satisfaction from extra goods influences market behavior.

The formal theory of marginalism emerged in the late 19th century through the work of William Stanley Jevons in England, Carl Menger in Austria, and Léon Walras in Switzerland. They shifted focus from how much it costs to make something to how much satisfaction consumers get from it, explaining 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 widely accepted in economics. His ideas were based on the labor theory of value, which looks at how much work goes into making something to decide its worth. Marx thought that supply and demand didn’t fully explain why things cost what they do.

Later critics from Marx’s way of thinking argued that marginalism didn’t pay enough attention to how things are actually made. They said it couldn’t clearly explain why prices stay the same for long periods or how prices change with different levels of income.

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.