Marginalism Definition How It Works Key Insight and Example
Marginalism is the economic principle that economic decisions and behaviors occur in increments, rather than categorically. People make decisions over specific units of economic goods, rather than in an all-or-none fashion.
The insight of marginalism is that each additional unit has its own level of utility. Each additional unit consumed has a specific benefit for consumers, while each additional unit produced has specific costs for manufacturers.
Marginalism originated in the 19th century with economists Carl Menger, William Stanely Jevons, and Leon Walras. It resolves the Diamond-Water Paradox, which argues that the use value of economic goods determines their values and market prices. However, marginalists believe that values are based on the specific uses people have for each individual unit of a good.
Diminishing marginal utility is the concept that the usefulness of each additional marginal unit of a good decreases. This explains why diamonds command a higher market price than water, as diamonds are rare compared to their usefulness.
Marginal utility was used to derive the laws of supply and demand, replacing older ideas like the labor theory of value. Marginal thinking is now considered a fundamental aspect of economics.
Marginalism can be seen in real-world human actions, such as making decisions about how many eggs to eat for breakfast. Marginal analysis allows individuals to evaluate the value and benefit of each additional unit consumed.
The law of diminishing marginal returns states that as additional units of a variable input are added to a fixed quantity of another input, the additional output produced will eventually decrease.
The marginal rate of substitution measures the rate at which a consumer is willing to exchange one good for another while keeping their satisfaction constant.
Marginalism has applications in consumer choices, production levels, resource allocation, pricing strategies, investment decisions, and supply chain management.
Critics argue that marginalism assumes perfect rationality and focuses too much on micro-level decision-making. It may also disregard broader concepts and assume all individuals are the same.
The key idea behind marginalism is that people make decisions based on the impact or utility of one additional unit.
The original marginalists were Carl Menger, William Stanely Jevons, and Leon Walras.
The Marxist response to marginalism is that it fails to consider the realities of the world and the dynamics of labor and production.
Overall, marginalism has allowed economists to understand human economic decisions and behaviors in a new way.
