Principles of Economics
Answer all the following questions as Marshall explains in this book. 1.What is utility?. 2.What is diminishing utility?. 3.What is marginal utility?. 4.What is the elasticity of demand?. 5.What is the difference in changes in amount demanded and changes in demand?. 6.What is consumer’s surplus?. 7.What was Marshall talking about in his famous scissors analogy?. 8.Does the time period matter to Marshall?. 9.What is the principle of substitution?.
Utility is the satisfaction or the benefit obtained by utilizing a product. Alternatively, he defines utility as the designated pleasure or desire for a commodity. Though his double definition has been criticized by others, Marshall used the terms appropriately, fitting particular situations, without any confusion. Marshall’s utility definition lies within the limits of possibilities of measuring mental states like desire and pleasure by assuming the monetary measure which accounts for the intensity of the pleasure/desire resulting from fulfillment.
Marshall defines diminishing utility in relation to the available stock. He states that the total satisfaction/desire/pleasure people gain from a commodity increases with increase in their stock of such a commodity, but not as fast such an item increases. According to Marshall, if a stock increases at a constant rate, the benefits/satisfaction derived from it increases at a falling rate. That is, the additional benefit person derive from increasing their stocks of a commodity decreases with every addition in the stocks they already have.
As people’s utility decrease, they are induced to purchase commodities at a marginal purchase because he is at the verge of doubt whether the purchase is worthwhile to incur costs on. The utility of a commodity at marginal purchase is called marginal utility. According to Marshall, when a person decided to make something instead on buying, his marginal utility is the portion he though it worthwhile to make. In other words, marginal utility of a commodity to a buyer diminishes with every addition to the amount that is already available.
According to Marshall, elasticity of demand in a market can be great or small depending on whether the amount of demand increases faster or lower for a given demand reduction or little for a given price rise. The five levels of elasticity he explained are elastic, highly elastic, absolutely elastic, less elastic, and inelastic. Demand for comfort is elastic, for luxury is higly elastic and for necessity is inelastic. Elasticity of demand is measured by either percentage price change or percentage change in amount of demand.
A change in amount demanded of a commodity is the change of quantity demanded resulting from price change. Supposing that the price of a commodity falls, the change of the quantity demanded is determined by the increasing demand quantity. On the other hand, Marshall defines a change in demand as a change in the entire purchase plan. It involves a larger or smaller amount of a commodity is demanded as before, hence leading to an entire curve shift.
In defining consumer surplus, Marshall noted the similarity of price for each commodity unit a consumer purchases, and highlighted the declining value of each additional unit. A consumer continues to make purchases until the marginal value and the price are the same. This means that all units purchased previous to the last one reaps the consumer a benefit by paying less than the cost of the good. This benefit value is known as the consumer surplus, and is the difference between the consumer’s value of the unit and the amount he pays for the unit.
Marshal uses and analogy of a pair of scissor and likens it to supply and demand. It is not useful to ask which blade does the cutting. The value of a commodity is governed by both utility and production cost. The fact that price can replace the value means that prices are existential between the supply and demand relationships.
In a supply curve, for a short time period, if price increases, the price level also increases, and vice versa. In long time period, what a plant supplies can be reproduced and resupplied within a given time. At last, cost of production is the major price determinant.
Lastly, Marshall defines the principle of substitution as follows: If commodity A is relatively cheaper than its auxiliary product, the customers’ consumption of A increase. Substitution leads to higher consumption at lower price and reduced consumption at higher price.
Reference
Marshall, A. (2009). Principles of economics: unabridged eighth edition. Cosimo, Inc..
