History of Economic Thought. Austrian school: marginal utility theory as a theory of pricing (most important)

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History of Economic Thought. Austrian school: marginal utility theory as a theory of pricing (most important)

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49. AUSTRIAN SCHOOL: THE THEORY OF MARGINAL UTILITY AS A THEORY OF PRICING

As the basis for pricing, the supporters of the Austrian school put forward subjective usefulness. The ancestor is Carl Menger (1840-1921) , professor at the University of Vienna. Trying to solve the paradox A. Smith about water and diamond, Menger formulated principle of diminishing utility. The value of any good is determined by the least utility that the last unit of the supply has, i.e.

Menger directly related the utility and scarcity of commodities. Ideas Menger developed E. Böhm-Bawerk (1851-1919), who introduced the concept of subjective and objective value.

subjective value he defined as a personal assessment of the goods by the consumer and the seller (determined by the lowest marginal utility of the item in stock, and the marginal utility depends on the following factors: the amount of goods and the intensity of consumption).

Objective cost he defines as exchange proportions (prices) that are formed in the course of competition in the market. The objective price is the result of a collision in the markets of subjective assessments of sellers and buyers, while the level of the market price is determined by the level of subjective assessments of the goods by two marginal pairs.

Disadvantages of the theory:

1) absolute inelasticity of supply (the stock of goods is specified as a fixed value);

2) the mechanism of equalization of marginal utility in the process of exchange occurs under the assumption of the available price and given incomes of the consumer.

This means that the subjective assessments themselves are determined by the level of price and the amount of income, and outside the price system there is no quantitative definition of utility.

Впервые law of marginal utility formulated Hermann HeinrichGossen (1810-1858), German economist, author of the work "The Development of the Laws of Social Exchange and the Consequent Rules of Human Activity" (1854), where the laws of rational consumption by an individual of a limited amount of goods are formulated, which later became known as the first and second laws Gossen.

Gossen's first law: the value of satisfaction from each additional unit of a given good in one continuous act of consumption steadily decreases and is equal to zero at saturation. It's nothing but diminishing marginal utility theory.

Gossen's second law: In order to obtain the maximum utility from the consumption of a given set of goods over a certain period of time, it is necessary to consume them in such quantities that the marginal utility of all consumed goods would be equal to the same value. This law can be interpreted as law of equal marginal utilities per unit of income. The consumption of each commodity continues until the marginal utility per unit of income becomes exactly equal to the marginal utility per ruble spent on any other commodity.

Utility Maximization Methodology, proposed by Gossen, entered economic science as a classical logic of decision making.

Author: Tatarnikov E.A.

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