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Supply and Demand Theory - Essay Example

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Supply and demand theory are fundamental to the entire study if economics and, indeed, may be understood as the foundations upon which the entire discipline is based upon. It is, thus, that theories of supply and demand consume so much space in economic literature, on the one hand, and command so much of the attention of economists, on the other…
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Supply and Demand Theory
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"Supply and Demand Theory"

Download file to see previous pages Following an objective presentation of the Marshellian demand curve and consumer surplus, as presented in Marshall's Principles of Economics, this essay will present the critical analytical opinions which the aforementioned has generated.
Integral to the comprehension and evaluation of the Marshellian demand curve and consumer surplus theory is Marshall's understanding of the implications of value and his classification of markets. Accordingly, this section will commence with Marshall's understanding of both of the stated, if only because they directly inform his supply and demand theory.
Marshall claims that the notion of value is intimately connected with that of wealth. After noting, however, that for Smith the term value has two uses (as use and exchange value), he, without apparent justification, contends that it is inaccurate to use the term "value" to express the utility of an object. Accordingly, he uses the term value to connote the exchange value of one thing in terms of another at any time and place, contending that it "is the amount of the second thing which can be got here and then in exchange for the first." Hence, insofar as Marshall is concerned, the term value "is relative and expresses the relation between two things at a particular place and time" (Marshall, p. 51).
In explaining exchange...
Hence, the "ultimate regulator of all demand" is the consumers' demand" (p. 75). To explain demand, Marshall turns to utility. For him, utility is taken as a 'correlative" to desire or want. Desire, however, cannot be measured directly, only indirectly "by the outward phenomena to which they give rise" and, "in those cases, with which economics is chiefly concerned," the measure is "found in the price which a person is willing to pay for the fulfillment or satisfaction of his desire" (p. 79). In this respect, Marshall is evidently opting for a behavioralist conception of utility.
Marshall proceeds to claim that there is a limit to each separate want, expressed as the "law of satiable wants or of diminishing utility:"
The total utility of a thing to anyone (i.e., the total pleasure or other benefits it yields him) increases with every increase in his stock of it, but not as fast as his stock increases" (pp. 78-79).
If the utility of his marginal purchase is the marginal utility, then the law just stated is, thus:
"The marginal utility of a thing to anyone diminishes with every increase in the amount of it he already has" (p. 79).
Marshall "translates" this "law of diminishing utility," following a behavioralist interpretation, in terms of price. If the price that a consumer is willing to pay for a good is called his demand price, then the law may be reworded as follows:
The larger the amount of a thing that a person has the less, other things being equal (i.e., the purchasing power of money, and the amount of money at his command being equal), will be the price he will pay for a little more of it. In other words, his marginal demand price for it diminishes (p. 80)
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