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Saturday, May 7, 2016

Econ Thought: The Law of Marginal Utility

In the study of economics, the Law of Marginal Utility is one of the key axioms to the entire body of knowledge. What are the key components that make the Law of Marginal Utility possible?  There are two: the Law of Non-Contradiction and Transitive Property

Law of Non-contradiction

This law of logic states the following: Something can not be itself and not itself at the same time. Using symbolic logic, (A) can not equal (-A). (A) must equal (A). Another translation of the Law of Non Contradiction is the following: The same object, or same person, can not be at two different points in space and time simultaneously. For example, one can not be at the movies, and not be at the movies at the same time. One can be at the movies at one point in time, then later in time, not be at the movies. Since someone can not be at two places at once, this forces the actor to prioritize his actions.

Transitive Property

Since the actor can only be in one place spatially and temporally, the actor picks one good, or activity, at a time.  If there are multiple activities, the actor must chose the sequence he prefers in a ordinal fashion, as time progresses. Hence, it is a play on the transitive property: If good (a) is preferred over good (b) and good (b) is preferred over good (c), then good (a) is preferred over good (c). Based on this property, the actor can show which goods he prefers over the other goods at that particular point in space and time.

Supply and Demand Curves are Created

From these two laws of logic, The Law of Marginal Utility is created. Based on this law, the downward sloping, from left to right, demand curve can be graphed. This demand curve, as time progresses, the price, as an expression of value, declines on the margin for each unit is purchased.  Conversely, the upward rising, left to right, supply curve can be graphed. This supply curve, shows that over time, as the need of the supply increases, the value of each unit increases, as expressed in the higher price on the margin per unit sold. The mid point where these two curves intersect is known as the equilibrium price.

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