Book 3, Chapter 3: Gradations of consumers’ demand

Although Marshall’s book was published in 1920, I cannot find any mention of “Spanish Flu” or influenza attached to him. If you have better memory (or google-fu skills) — then please send me links!

Our current chapter begins with the statement that a manufacturer’s demand (willingness to pay) for an intermediate good depends on the final consumer’s demand for that good. And that consumer’s demand — in terms of purchases or actions — indirectly signal desire, which cannot be directly measured.

Hmmm. Marshall says “utility is correlative to desire” [p78], but I am not sure if he means that utility is equivalent to demand. He says desires drive activities and choices while utility represents the full/partial achievement of those desires.

“There is an endless variety of wants, but there is a limit to each separate want. This familiar and fundamental tendency of human nature may be stated in the law of satiable wants or of diminishing utility thus:—The
total utility of a thing to anyone (that is, the total pleasure or other benefit it yields him) increases with every increase in his stock of it, but not as fast as his stock increases… In other words, the additional benefit which a person derives from a given increase of his stock of a thing, diminishes with every increase in the stock that he already has.” [pp 78-79]

This is Marshall’s first elaboration of decreasing marginal utility (DMU) in consumption [he earlier refers to the marginal utility of income], a concept that revolutionized economic thinking around 1870. From here, Marshall explains how our purchases consider the marginal benefit of each additional item; links these concepts to older ideas on the marginal productivity of land; notes that decrease only begins once one has achieved a “critical mass” of initial consumption (thus, one must paint the entire wall before seeing a decreased benefit from additional painting); and describes how utility need not be consistent with the passing of time:

It is therefore no exception to the law [of DMU] that the more good music a man hears, the stronger is his taste for it likely to become; that avarice and ambition are often insatiable; or that the virtue of cleanliness and the vice of drunkenness alike grow on what they feed upon. For in such cases our observations range over some period of time; and the man is not the same at the beginning as at the end of it. If we take a man as he is, without allowing time for any change in his character, the marginal utility of a thing to him diminishes steadily with every increase in his supply of it 

He ends this section referring the reader to the Mathematical Appendix. There, we can see the calculus underlying his exposition. There, we also see how he preferred reasoned prose over mathematical assertion in his economics.

§2. Marshall then explains how DMU relates to prices, and the difference between “demand price” that varies with quantity already consumed and the “marginal demand price” that eventually limits quantity demanded to where the utility of the last unit consumed equals (or just barely exceeds) the market price of the good.

This calculus, he continues, means that the ratios of marginal utilities of different products will match the ratios of their prices, a concept that is simultaneously obvious and mind-blowing.

§3. The marginal utility of money also declines as one gets more of it, since “every increase in his resources increases the price which he is willing to pay for any given benefit.” Put differently, you’re willing to spend more to get the same utility (benefit) when you have more to spend (and thus less worry about foregoing consumption of other goods).

§4. Marshall sets out a demand schedule (of prices and quantities) which leads to a demand curve with quantity on the horizontal axis and price on the vertical axis. Although this “inverse demand curve” is one of the most well known figures in economics, it is Marshall, I think, who first introduces its use, here. (See my paper [pdf], which asks “is inverse demand perverse?”)

Marshall then gives an elegant description of why economists use “smooth” demand curves in a world in which our demand (for wedding cakes, for example) is anything but smooth:

In large markets, then—where rich and poor, old and young, men and women, persons of all varieties of tastes, temperaments and occupations are mingled together,—the peculiarities in the wants of individuals will compensate one another in a comparatively regular gradation of total demand. [p83]

In sum, there is “a general law of demand:—The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or, in other words, the amount demanded increases with a fall in price, and diminishes with a rise in price” [p 84].

§6. Marshall ends the chapter* with the caveat — and foreshadowing of future discussions — that the demand schedule is only valid for a given set of conditions, meaning that it could shift in or out, steepen or flatten if those (ceteris paribus) circumstances change. (He mentions how prices of complementary or substitute goods matter; how spectators can manipulate prices by sending false signals; and how a local panic can change general demand for a product — toilet paper in a corona-crisis, for example.)

* His last footnote (p85) is remarkable: Marshall says that the marginalists of the 1870s, who used the differentials of calculus to explain how a small change in price led to a small change in demand (“direct demand curve”) were preceded by others using the same ideas and techniques over 30 years earlier. #nothingnewunderthesun.

Interesting stuff

  1. A frenetic, on point, essay on doing GOOD C-19 research and the value of different perspectives in seeking answers
  2. C-19 will scar Millennials (part 2 of their financial crisis scar) in the same way as the Depression hit Boomers’ parents. Government action and personal safety will never be the same.
  3. My risk is not your risk, which is not social risk. When making big decisions (close the borders, spend $trillions, triage who dies), these differences are important.
  4. The Russians are C-19 immune, for obvious reasons
  5. Money vs public health, a look back on cholera
  6. Facemasks protect others from you but may not protect you from others
  7. The fresh-food supply of the US could collapse if farmworkers get C-19. Related: NPR podcast on the same topic.
  8. How can a small, open economy like the Netherlands protect itself from trade and food supply disruptions?
  9. This op/ed has some good advice on “smart quarantine” (let less-vulnerable people out to work; test lots of people; isolate vulnerable populations)

Non-coronavirus links!

  1. Advertisers should pay an escalating tax to discourage mass-manipulation

H/T to DS and RD