Demand - History of Economic Thought - Lecture Slides, Slides of Economics

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Bentham, Mill and Dupuit: The Rise

of Demand in Classical Theories of

Value

Contents

• To look at the Rise of Demand in Classical Theories of Value … - Jeremy Bentham - John Stuart Mill - Jules Dupuit
• … and to finish our discussion of the Classical School … - Jean Baptiste Say

The idea of utility maximization

• Bentham argued that our choices are based on utility maximization.
• Bentham provided the first statement of what has since become a commonplace idea: - economic analysis would be enriched if it makes use of and explores the implications of the assumption that human beings do what they do in order to maximize utility, which is the excess of pleasure over pain

Utilitarianism

• Bentham argued that our ethical choices must be based on maximization of the sum of utilities.
• Bentham went on to propose a theory of ethics called utilitarianism.
• According to Bentham's utilitarianism, the right thing to do in any situation—personal or political—is to make the choice that maximizes "the greatest happiness of the greatest number".

Utilitarianism

• The assumptions (i) and (ii) on which Betham's utilitarianism is based are highly suspect in the eyes of many economists.
• Besides, in cases in which Jack's well being is linked in some (perhaps malign) way to Jill's well-being, utilitarianism can generate ethical prescriptions that offend our natural sense of the inviolability of individual rights.
• (Cardinal utility—formalized by Daniel Bernoulli and William Forster Lloyd—and interpersonal comparability of utilities makes total utility a meaningful concept.)

Egalitarianism

• Interpersonal comparability and Diminishing Marginal Utility—formalized by Daniel Bernoulli—gave an egalitarian flavor to utilitarian ethics.
• If, in addition to assumptions 1 and 2, we also accept the assumption that the link between one's happiness (or, utility) and one's wealth is 3. the same for all people and 4. characterized by diminishing marginal utility (that is, the twenty-first dollar you earn contributes more to your utility than the five hundredth dollar you earn), …
• … we are led to the conclusion that the most ethical distribution of wealth is also the most equal distribution of wealth in which every person has the same amount of money.

JOHN STUART MILL (1806-1873)

Theory of International Values

• Mill solved a problem left open by Ricardo.
• Ricardo had used only production costs.
• Mill used demand as well.
• The stronger is a country’s demand for its imported good, the closer the free trade price would be to the country’s pre-trade price and, therefore, the smaller would be the country’s gains from trade.

Terms-of-trade justification for a tariff

• Mill and Torrens speculated that in some cases this positive effect of the tariff—called the terms- of-trade effect—might outweigh the negative effect and the tariff may end up being beneficial.
• However, the gain to the tariff-imposing country would be outweighed by the damage done to its trading partners and, therefore, the tariff would end up being worse for the world.

Technological Progress

• Mill showed that export-biased technological progress might have adverse effects on terms of trade.

JULES DUPUIT (1804-1866)

Willingness-to-pay and utility

• Dupuit argued that utility (or, happiness) can be measured by willingness to pay. - Marginal utility of money implicitly assumed to be constant.

Willingness-to-pay and demand

• The area under Dupuit’s demand curve is a measure of total utility.
• In this way the link between marginal utility (height) and total utility (area) was clarified

Consumer Surplus

• Dupuit defined consumer surplus as the excess of the total utility from a purchase over the consumer’s payment for the purchase
• Dupuit showed that increases in price reduce the consumer surplus