Marginal utility
[citation needed] Initially, the term utility equated usefulness with the production of pleasure and avoidance of pain by moral philosophers, Jeremy Bentham and John Stuart Mill.
Assumptions - Modern economics employs ordinal utility to model decision-making under certainty at a specific point in time.
[15] The law of diminishing marginal utility is that subjective value changes most dynamically near the zero points and quickly levels off as gains (or losses) accumulate.
For example, dosages of antibiotics, where having too few pills would leave bacteria with greater resistance, but a full supply could affect a cure.
At the point where this becomes a reality, the marginal utility of the raw material required to provide the service will increase significantly.
This is akin to situations involving massive objects like aircraft carriers, where the quantity of such items is so small that the concept of marginal utility becomes irrelevant, and the decision to acquire them is a simple binary choice between "yes" or "no".
This concept is helpful for explaining the principles of supply and demand, and is essential aspects of models of imperfect competition.
Some scholars, such as Warren J. Samuels, have raised concerns that individuals may not always behave as portrayed in marginalist theories, highlighting complexities in human decision-making that go beyond simple optimizing behavior.
[23] Another limitation lies in measuring the marginal change: while monetary values can be straightforward to track, gauging the utility derived from non-monetary goods like food is more challenging, as individual preferences and the wide range of alternatives complicate accuracy.
[28][29][30][31][32] Numerous economists have established a connection between utility and rarity, which influences economic decisions and price determination.
[33] Eighteenth-century Italian mercantilists, such as Antonio Genovesi, Giammaria Ortes, Pietro Verri, Marchese Cesare di Beccaria, and Count Giovanni Rinaldo Carli, held that value was explained in terms of the general utility and of scarcity, though they did not typically work-out a theory of how these interacted.
Like the Italian mercantists, Étienne Bonnot, Abbé de Condillac, saw value as determined by utility associated with the class to which the good belong, and by estimated scarcity.
This last point was famously restated by the Nineteenth Century proto-marginalist, Richard Whately, who in Introductory Lectures on Political Economy (1832) wrote: It is not that pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price.
Daniel Bernoulli, is credited with publishing the first clear statement on the theory of marginal utility in his paper "Specimen theoriae novae de mensura sortis",[36] which was released in 1738, although he had drafted it in 1731 or 1732.
[37][38] Gabriel Cramer had developed a similar theory in a private letter in 1728, aimed at resolving the St. Petersburg paradox.
The importance of his statement seems to have been lost on everyone (including Lloyd) until the early 20th century, by which time others had independently developed and popularized the same insight.
[40] In An Outline of the Science of Political Economy (1836), Nassau William Senior asserted that marginal utilities were the ultimate determinant of demand, yet apparently did not pursue implications, though some interpret his work as indeed doing just that.
[42][43] In 1854, Hermann Heinrich Gossen published Die Entwicklung der Gesetze des menschlichen Verkehrs und der daraus fließenden Regeln für menschliches Handeln, which presented a marginal utility theory and to a very large extent worked-out its implications for the behavior of a market economy.
However, Gossen's work was not well received in the Germany of his time, most copies were destroyed unsold, and he was virtually forgotten until rediscovered after the so-called Marginal Revolution.
[citation needed] Marginalism eventually found a foothold by way of the work of three economists, Jevons in England, Menger in Austria, and Walras in Switzerland.
Marie-Esprit-Léon Walras introduced the theory in Éléments d'économie politique pure, the first part of which was published in 1874 in a relatively mathematical exposition.
But, while Clark independently arrived at a marginal utility theory, he did little to advance it until it was clear that the followers of Jevons, Menger, and Walras were revolutionizing economics.
While the approaches of Jevons, Menger, and Walras had notable differences, the second generation of economists did not maintain these distinctions based on national or linguistic boundaries.
Some scholars, such as Friedrich Hayek and W. W. Bartley III, have speculated that Marx may have come across the works of one or more of these economists while reading at the British Museum.
However, it is also possible that Marx's inability to formulate a viable critique may account for his failure to complete any further volumes of Kapital before his death.
[67] At first, there were only a few Marxist responses to marginalism, including Rudolf Hilferding's Böhm-Bawerks Marx-Kritik (1904)[68] and Politicheskoy ekonomii rante (1914) by Nikolai Bukharin.
Followers of Henry George's ideas such as Mason Gaffney view marginalism and neoclassical economics as a response to Progress and Poverty, which was published in 1879.
In his 1881 work Mathematical Psychics,[71] Francis Ysidro Edgeworth presented the indifference curve, deriving its properties from marginalist theory which assumed utility to be a differentiable function of quantified goods and services.
The expected utility hypothesis of Bernoulli and others was revived by various 20th century thinkers, with early contributions by Ramsey (1926),[78] von Neumann and Morgenstern (1944),[79] and Savage (1954).
A major reason why quantified models of utility are influential today is that risk and uncertainty have been recognized as central topics in contemporary economic theory.
