Marginalism

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. For example, it states that the reason why the price of diamonds is higher than that of water owes to the greater additional satisfaction of the diamonds over the water. Thus, while the water has greater total utility, the diamond has greater marginal utility.

Although the central concept of marginalism is marginal utility, marginalists, following the work of Alfred Marshall, drew upon the idea of marginal physical productivity in explanation of cost. The concept of marginalism came from Carl Menger, William Stanley Jevons, and Leon Walras when resolving the Diamond-Water Paradox propounded by Adam Smith by distinguishing between total utility and marginal utility. The neoclassical tradition that emerged from British marginalism abandoned the concept of utility and gave marginal rates of substitution a more fundamental role in analysis. Marginalism is an integral part of mainstream economic theory.