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Satisfying demand: W. S. Jevons and the law of diminishing marginal utility

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  1. Introduction
  2. The transition toward neo-classical economics
  3. The Theory of Political Economy
  4. Jevons revolutionized political economic thought
  5. The law of diminishing marginal utility and the utility-maximizing rule
  6. Description and analysis of Jeveons' model
  7. Conclusion
  8. Works cited

W. S. Jevons' The Theory of Political Economy marks the shift from classical to the development of neo-classical economic theory in the nineteenth century. Classical political economy originated in the eighteenth century as an expansion of moral philosophy, uniting observation of facts with deductive analysis of cause and effect relationships to explain the workings of the economic system [Black, 1970]. The writings of British philosophers John Stuart Mill and Jeremy Bentham combined to produce a theory of utilitarianism that viewed human activity motivated by pleasure, and the maximization of an individual's pleasure while minimizing their pain as the aim of moral philosophy; that is, as the condition of happiness. The realization that people sought pleasure as the good was combined with the work of Adam Smith in The Wealth of Nations to form classical economic theory. Smith found that national wealth depended upon the degree of division of labor, or social stratification, in a given economy which would allow the maximum production of goods by specialized tradesmen. Analyzing economic progress as based on self-interest, or the desire of individuals to increase their own happiness, allowed Smith to posit that natural competition based around market prices determined by supply and demand would create an ?invisible hand? to direct social prosperity. By minimizing government intervention in business, which Smith saw as promoting favoritism, the principle of laissez-faire would see competition prevent monopolies and ensure the greatest production of goods and wealth through a capitalist economy.

[...] Rather, this revision in the concept views value dependent upon short-run exchange-ratios determined by the psychology of parties undergoing the transaction. The theory presented by Jevons would be termed the law of diminishing marginal utility: it is seen that consumers will derive overall satisfaction from consuming a particular product, or their total utility, which depends on the number of units he or she purchases [Lovewell, 2002]. Referring to previous work accomplished by Bentham and Mill, who believed utility could be measured in units or Jevons proposed that marginal utility would fall at higher consumption levels. [...]

[...] Lovewell [2002] notes that long as consumers can say they prefer one set of products to another (without having to state exactly how much more they prefer conclusions like those drawn from the law of diminishing marginal utility and the utility-maximizing rule can still be reached.? In fact, Jevons' fixation of positive economics as the central preoccupation of The Theory of Political Economy is perhaps his most significant contribution to the modern study of economics, as it allowed the development of micro-economic theory and analysis which sought to comprehend individual action as determining price without relying on the previous maxims of classical macro- economic thought which predicated price and value as determined by the contribution of labor to a particular good. [...]

[...] The assumption that utility theory positively directs human actions is a considerable obstacle in Jevons' model of the law of diminishing marginal utility, and its foundation on the concepts of pleasure and pain. As previously indicated, process theory (as first proposed by Kahneman and Tversky in 1977) theorizes that cognitive actions are based upon heuristic decision-making. Utility theory proposes that the individual is a rational being capable of maximizing their pleasure while minimizing their pain, but discoveries in cognitive process reveal that individuals will act according to unstated rules or heuristics when the outcome of an action is not certain. [...]

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