Marginalism
Also called: Marginal revolution · Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT
Meaning
Marginalism was the shift in the 1870s to explaining value by marginal utility, the extra satisfaction from one more unit, instead of by the labour cost of making a good. Three thinkers reached it independently: William Stanley Jevons (1871), Carl Menger (1871) and Léon Walras (1874). Marginal utility is written as MU = ΔTU / ΔQ, the change in total utility divided by the change in quantity. Marginalism became the base of neoclassical economics.
Example
It solves the diamond-water paradox. Water is vital for life but plentiful, so one more litre adds little satisfaction and its price is low. Diamonds are scarce, so one more diamond adds a lot of satisfaction and its price is high.
Don't confuse with
- Labour theory of value (Smith, Ricardo): value depends on the labour time needed to make a good. Marginalism says value depends on the satisfaction from the last unit.
- Jevons paradox: the same W.S. Jevons, but a different idea (The Coal Question, 1865). It says greater efficiency in using a resource can raise its total use.