Why do individuals pay much higher prices for some products than for others?
To answer this question, economists refer to the law of diminishing marginal utility. Traditional economics explains the law of diminishing marginal utility in terms of the satisfaction one derives from consuming a particular good. For example, an individual may derive great satisfaction from consuming an ice cream cone. However, the satisfaction he will derive from consuming a second cone may also be great but not as great as the satisfaction derived from the first cone. The satisfaction of consuming a third cone is likely to decrease further, and so on.
From this, mainstream economics concludes that the more good we consume in a given period, the less satisfaction or utility we derive from each additional or marginal unit. It is also established that, because the utility of a good decreases as we consume more and more of it, the price we are willing to pay per unit of the good also decreases.
Utility in this way of thinking is presented as a certain amount that increases at a decreasing rate as more of a particular good is consumed. Utility is seen as a feeling of satisfaction or pleasure arising from the purchase or use of goods and services.
In this way of thinking, an individual’s utility scale is hardwired into their head. This scale determines for the individual whether he will buy a particular good. If the preferences are constant, it is possible to capture these preferences by means of a mathematical formula, so it is held. This formulation is qualified as a utility function.
In addition, since the utility is presented as a total quantity, it becomes possible to verify the addition to this total, which is labeled as additional utility or marginal utility.
However, does it make sense to discuss the process of valuing a property without reference to the purpose that property serves?
Menger’s explanation of how evaluations are formed
According to Carl Menger, the founder of the Austrian School of Economics, an individual assigns values to goods based on the importance of those goods to their life. Various purposes that an individual considers important to their life are then evaluated in descending order.
On what Menger wrote,
With regard to the differences in the importance that different satisfactions have for us, it is above all a fact of the most common experience that the most important satisfactions for men are generally those on which the maintenance of life depends. , and that other satisfactions are graduated. in magnitude of importance according to the degree (duration and intensity) of the pleasure which depends on it. Thus, if men economizers have to choose between the satisfaction of a need on which the maintenance of their life depends and one on which simply depends a greater or less degree of well-being, they will generally prefer the former.
Take the example of Jean the baker, who produced four loaves of bread. The four loaves of bread are his resources or means that he uses to achieve various ends. Let’s say his highest priority or highest goal is to have a loaf of bread for himself. This means that John will keep a loaf of bread for his personal consumption. The consumption of a loaf of bread is of the utmost importance for the maintenance of one’s life.
John trades his second loaf of bread for five tomatoes, which helps John secure his second most important ending. For John, the five tomatoes will improve his life and well-being. John then trades his third loaf of bread for a shirt – his third most important ending. Finally, John decides that he will allocate his fourth loaf to feed the wild birds. Feeding the birds is ranked fourth on John’s priority list for his life and well-being.
The ends determine the importance of the means
Observe that in order to reach the second and third ends, John had to exchange his resources – loaves of bread – for goods that would serve his ends. To finish having a shirt, John had to trade in his loaf of bread for the shirt. The loaf of bread on its own is not suitable to fulfill the services provided by the shirt.
The adequacy of means is what gives them value in relation to a particular “end”. For example, in fixing the end of having a shirt, John has to decide whether it will be a leisure shirt or a work shirt. John will have to choose from different shirts that are most suitable for his end – let’s say have a work shirt. Being a baker, John may conclude that the shirt should be white in color and made of a thin rather than thick material to keep him comfortable when working next to a hot oven. Note that his selection is based on the facts of reality – he needs a comfortable shirt to work. In this sense, the chosen shirt promotes John’s life and well-being. As far as John is concerned, feeding the wild birds is among the least important given his reserve of resources – four loaves of bread.
As can be seen, John used the first loaf of bread to ensure his most important end, the second loaf of bread to ensure his second most important end, etc. From this we can deduce that the end attributes importance to the resource employed to secure that end. This implies that the first loaf of bread has a much higher importance than the second loaf of bread due to the more important end or purpose that the first loaf ensures.
Why the value of goods is determined by the less important end
Because John considers each of the four loaves of bread in his possession to be identical, it means that each loaf could be used by him for one of his purposes. How then does he value each loaf of bread in his possession? He attributes to each loaf of bread the importance attributed to its lesser purpose, which is to feed wild birds. Why is the lesser end used as the standard for valuing loaves of bread?
If John were to use the higher end as a standard for assigning a value to each loaf of bread, that would imply that he values the second, third, and fourth loaves much more than the ends he gets. (Remember that the second loaf of bread helps John secure his second most important end; the third loaf of bread, the third most important end; and the fourth loaf of bread, the fourth most important end).
However, if so, what’s the point in trying to trade something more valued for something less valued? Note that to ensure his second ending of getting five tomatoes, John would swap a loaf of bread. If John values a loaf of bread with more than five tomatoes, there will obviously be no exchange. However, if each loaf is rated according to the lesser end (end number four) that feeds wild birds, then five tomatoes will be rated by John higher than a loaf of bread. Therefore, an exchange will take place.
Since the fourth loaf of bread is the last unit of John’s total supply, she also called the marginal unit – the unit at the margin. This marginal unit provides the less important end. Alternatively, we can also say that the marginal unit provides the least benefit when it comes to the maintenance of life.
If John had only three loaves of bread, that would mean that each loaf would be valued according to ending number three – having a shirt. This end is better classified than the end of feeding wild birds.
From this we can deduce that as the bread supply decreases, the marginal utility of the bread increases. This means that each loaf of bread will have a much higher value now than it was before the bread supply fell. Conversely, as the supply of bread increases, its marginal utility decreases, with each loaf of bread now valued less than before the increase in supply. Note that the law of decreasing marginal utility is derived here from the fact that individuals use means to ensure ends.
The ends are not fixed arbitrarily
Ends are not set arbitrarily but are classified according to their importance in sustaining life. If John had arbitrarily classified his extremities, he would have run the risk of putting his life in danger. For example, if he had devoted most of his resources to clothing and feeding wild birds and very little to feeding himself, he would have run the risk of becoming seriously ill.
Note that by choosing a particular end, an individual also sets a standard for evaluating various means. For example, if my goal is to provide a good education for my child, then I will explore various educational institutions and rate them based on my information regarding the quality of education that these institutions provide. This means that my grade level of these institutions is my end, which is to provide my child with a good education. Another limitation in achieving various goals is the availability of suitable means. So, to quench my thirst in the desert, I need water. Diamonds in my possession will be of no use in this regard.
Total utility does not exist
Marginal utility is not, as the dominant perspective postulates, an addition to total utility, but rather the utility of the marginal end. There is no such thing as adding to the total utility due to an additional unit of a property. Utility does not relate to quantities but to the priorities or the classification that each individual sets for himself in relation to his life.
A particular end fixes the value of the corresponding means. Ends are not set arbitrarily but on the basis of their ability to support people’s lives and well-being. In this sense, evaluations always refer to the facts of reality. If people were to form assessments arbitrarily, they would run the risk of putting their lives and well-being in danger.
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