Response Paper #3 - Menger & Jevons

Arnon Wu 6448143929

Preface

The file for this book was so big that the pages would not load completely so I
only see snippets of the passage. I read mostly through summaries.

The Theory of Political Economy - William Stanley Jevons

Chapter 1 introduces the main idea that the value of something is determined by
its utility. This idea is one of the main shifts from classical (value determined by labour
hours) to neoclassical economics. He further claims that the value of a good and service
can change with circumstances, and that it is not always possible to express value in
terms of money.

An anecdotal example I can think of is designer bags. A Louis Vuitton bag can
take between 3-45 hours to produce, not too different from other grades of bags, but
their prices are set much much higher. A lot of it comes down to their marketing and
brand image and how people perceive the brand’s value. The utility (satisfaction and
pleasure) it provides to people is different. To someone like me who doesn’t place any
value on it, the pricing wouldn’t match my willingness to pay. Jevons argues that this
difference in values and utility allows for exchange. Trading allows both parties to
increase total utility.

Chapter 2 looks more closely at consumers’ behavior. Since Jevons idea of value
is subjective, it cannot be objectively measured so he uses the concept of diminishing
marginal utility to help. Diminishing marginal utility adds more implications to utility
maximisation during trades and that both parties try to achieve similar ratio of marginal
utility. If two goods provide the same utility to an individual then they are indifferent.

The next chapter builds on the same idea and looks at the final degree of utility. It
is about how much utility is derived from consuming the last unit of goods/services.
Jevons says it would always be decreasing if we follow law of diminishing marginal
utility. I agree with the idea that consuming beyond a certain point will make total utility
decrease. For example, I love ice cream but if I had to consume too much, I would
begin to suffer from bloating and stomache aches, which would drive my utility down.

The last chapter we look at discusses more about exchange with the main focus
on theory of marginal rate of substitution (amount of commodity willing to give up in
exchange for more unit of another commodity). This rate is equal to the ratio of marginal
utilities between both goods. I think this conccept is like a Cobb-Douglas indifference
curve where averages is better than extremes.