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Price is determined by both marginal utility and marginal cost, and here is the key to the apparent paradox. The marginal cost of water is lower than the marginal cost of diamonds. That is not to say that the price of any good or service is simply a function of the marginal utility that it has for any one individual or for some ostensibly ...
The theory of marginal utility, which is based on the subjective theory of value, says that the price at which an object trades in the market is determined neither by how much labor was exerted in its production nor on how useful it is on the whole. Rather, its price is determined by its marginal utility. The marginal utility of a good is ...
Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. It states that the reason why the price of diamonds is higher than that of water, for example, owes to the greater additional satisfaction of the diamonds over the water.
According to this theory, the consumer places a value on a commodity by determining the marginal utility, or additional satisfaction of one additional unit. [17] [18] Marginalism employs concepts such as marginal utility, marginal rate of substitution, and opportunity costs [19] to explain consumer preferences and price.
Under the standard assumption of neoclassical economics that goods and services are continuously divisible, the marginal rates of substitution will be the same regardless of the direction of exchange, and will correspond to the slope of an indifference curve (more precisely, to the slope multiplied by −1) passing through the consumption bundle in question, at that point: mathematically, it ...
Marginal utility usually decreases with consumption of the good, the idea of "diminishing marginal utility". In calculus notation, the marginal utility of good X is =. When a good's marginal utility is positive, additional consumption of it increases utility; if zero, the consumer is satiated and indifferent about consuming more; if negative ...
The negative slope of the indifference curve reflects the assumption of the monotonicity of consumer's preferences, which generates monotonically increasing utility functions, and the assumption of non-satiation (marginal utility for all goods is always positive); an upward sloping indifference curve would imply that a consumer is indifferent ...
Using the numeraire, he determined that marginal utility [rareté] divided by the price must be equal for all commodities. Then he argued that, because each individual consumer consumes as much value as the value of that individual's stock of goods, the value of total sales equals the value of total purchase.