Lecture 6.

Jevons, Menger, and the

Foundations of Marginal Analysis.
Inadequacies of the Classical Theory of Value. What is
Utility? Comparisons of Utility. Utility Functions. Utility,
Demand, and Exchange The Value of Factors of Production.
Ph.D st. Gular A. Aliyeva
Lecturer UNEC/SABAH Groups
g.a.aliyevaa@gmail.com

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Decline of classical economics and the rise of neoclassical economics

§ From 1870s on classical economics has been declining

§ Transformation from classical into neo-classical economics
§ Introduction of marginal analysis – concepts like MU, MP, MC and
others
§ Marginal concepts illustrate effects of utility, production,
consumption, etc. of one more unit of a good

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Marginal analysis late in 19th century

§ First application of marginal analysis – theory of demand and the concept of

marginal utility (MU)
§ Later – other applications
§ Contributed to the popularization of mathematics in
§ economics
§ In 1870-1900 almost all microeconomic theory was transformed with the help of
marginal analysis
§ Classical microeconomics became rejected
§ Microeconomics (e.g. problem of allocation) became the main focus of
economists

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 Foundations of Marginal Analysis

William Stanley Jevons (1835-82), Carl Menger (1840-1921), Leon Walras (1834-1910),
Theory of Political Economy, 1871 Principles of Economics, 1871 Elements of Pure Economics, 1874

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Marginalists on economic methodology

§ Walras – economics should be a mathematical science

§ Jevons – more empirical work in economics
§ Menger – deductive, but not mathematical approach
§ Walras introduced also general equilibrium theory in economics, while
Menger founded the so-called Austrian school of economics.
§ All three of them thought that they discovered new, revolutionary
theory of relative prices (theory of value).

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Marginalist theory of value

§ According to this (marginalist) theory, value depends entirely on

marginal utility from the consumption of the good.
§ MU is the increase in total utility as a result of consuming one
more unit of the good.
§ This theory contradicts classical theory of value – theory based
on costs of production.

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Menger’s Table (Marginal utility in Arabic numerals)

§ Class I good is water and the class VIII good is

diamonds.
§ If a consumer had already consumed 8 units of
water and none of diamonds, the marginal utility
of another unit of water would be only 2, but
that for the first unit of diamonds would be 3.
§ The total utility of water, which is the sum of
marginal utilities, is clearly greater than that of
diamonds, yet the value of another unit of
diamonds is greater than that of another unit of
water.
§ The price of diamonds is greater than the price of
water because it is marginal utility that
determines consumer choice, and hence price.

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Marginalist theory of value

§ Marginalist theory of value explains prices from the demand (consumer’s) side of the
market, while classical theory – from the supply (producer’s) side of the market
§ According to marginalists, theory of prices based on MU is more general than classical
theory of prices, hence it is a better theory.
§ Marginalists thought that you can measure utility without any problems and that the
principle of diminishing MU operates.
§ They also assumed that the utility from the consumption of any good depends only on
the quantity of this good consumed. That is they excluded relations of
complementarity or substitution between goods.
§ With those assumptions they were able to prove that the familiar now condition must
be fulfilled if consumers are to maximize utility: MUa/Pa = MUb/Pb ... = MUx/Px
§ Walras was able also to prove that MU determines demand and that demand curve is
negatively sloped.

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