To the next chapter.The Reasonable Dialog on the theory of demand began with the idea that willingness to pay for a good or service might be related to the utility derived from the good or service -- and quickly rejected it, since that idea seemed to be undercut by the "Paradox of Diamonds and Water." However, the alternative approach (the Labor Theory of Value) had its own problems, and nearly 100 years later, economists reconsidered the issue. Using the marginal approach -- for the first time -- economists of the 1870's realized that willingness to pay for one unit of a good or service would depend on the marginal utility, not the total utility. In the light of that understanding, the paradox was not a paradox at all. The marginal approach undercut the paradox, and restored the credibility of the utility approach. A "new economics" of consumer demand was created on the basis of marginal utility.
But there were other problems with the utility approach. Not everyone could accept the idea of direct numerical measurement of consumer satisfaction. What are the units? Are they the same for different people, or different, and if they are different for different people, how can that be considered measurement? Some of the critics proposed an alternative approach that does not assume any numerical measurement of satisfaction. The alternative approach is based on the idea that people can say which alternative "market basket" they prefer. That sounds pretty common-sensical -- and I think it is -- but as so often in economics, the trick is in putting it to work to understand concepts like equity, inflation, and the limits of the "Law of Demand." For that purpose, complicated diagrams and even abstract mathematics may be necessary. We have seen a few examples, most of them relatively simple. Relatively, that is, by comparison with the more advanced economics that makes regular use of concepts like indifference curves and compensating income variations.
To the next chapter.
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