<p>There are some misconceptions, that when corrected hopefully clear this out.</p>
<p>You claim;</p>
<blockquote>
<p>Marginalists oppose the labour theory of value by claiming that the value of a good is equal to its price, and this price is given by the interplay of supply and demand.</p>
</blockquote>
<ol>
<li>Marginalists <strong>do not</strong> claim that value of a good is equal to its price, nor do they claim that value is generally equal to supply and demand equilibrium (see Brue and Grant History of Economic Thought 9th Ed pp 231-248).</li>
</ol>
<p>In standard price theory supply and demand will meet at the point where marginal value equal  marginal costs, but that is based on total market demand, not individual demand (unless we are dealing with special case with only one buyer). For all but last individual in the market the value of a good will typically  be  higher than the market price (outside some special cases like perfectly elastic demand).</p>
<p>Furthermore, you are implying that the equilibrium price is determining value, whereas, it is exactly the opposite. Social marginal value of a good determine the equilibrium price.</p>
<ol start="3">
<li>Even proponents of the labor theory of value (LTV) thought that prices are determined by supply and demand. Adam Smith and David Ricardo, who are the major developers of LTV, claimed both that prices are determined by supply and demand and that value is determined by labor (ibid pp 61-117). For example, for Smith LTV determined the &quot;long-run&quot; value of a good, but &quot;short-run&quot; fluctuations in prices were explained by fluctuations in supply and demand (also I am using scare quotes because he did not use the modern terminology, but if you read WoN his ideas map relatively well to what we consider short and long run in modern economics).</li>
</ol>
<p>So the premise of your question is simply incorrect, price is not considered always equal to the value in economics. Nor marginalists or classical economists like Smith thought that price always equals value of a good. Furthermore, it is the other way around, in modern price theory (which is based on marginalism) price is formed from intersection of demand and supply, where demand and supply depend on how much value consumers and producers put on the good, on margin, not the other way around.</p>
<blockquote>
<p>However, assuming an ideal market in which the market clears, supply and demand are in equilibrium. How does a marginalist perspective explain, why – say – a bicycle costs more than an apple?</p>
</blockquote>
<p>Marginalists, alongside modern economists, use subjective theory of value, which posits that value is subjective and derived from people's preferences that are either exogenous (given by nature) or potentially endogenous (given by nurture). For example, water has value because people subjectively enjoy the feeling of quenching thirst, or funko pop figurine has value because people subjectively enjoy collecting some pop culture figurines.</p>
<p>The exact value depends on intensity of people's preferences as well as current level of consumption of good. So the explanation is simply that at current level of apple consumption and bike consumption people subjectively think that bikes are more valuable than apples. The insight of marginalism was that value of the good is not same for any volume of consumption but also depends on how much person is already consuming of the said good.</p>
<p>This can be illustrated with an example;</p>
<p>Suppose we have person who's preferences over consuming food (F), electronics (E) and leisure (L) are represented by following utility function;</p>
<p><span class="math-container">$$U = 10F^{0.5} + 3E^{0.2} + 4L^{0.3}$$</span></p>
<p>Moreover, suppose that this person has access to 100 units of food, 20 units of electronics and 10 units of leisure. Furthermore, assume for simplicity that 1 util = 1 dollar.</p>
<p>From this utility and the endowment we can calculate that the total value of 100 units of food for this individual is 100 dollars, average value of food for this individual is 1 dollar and at the margin the value of consuming additional food for this individual is <span class="math-container">$dU/dE(100)=0.5$</span> dollar. For electronics the total value is in ballpark of 5.5 dollars, average value is about 0.27 dollars and value of last unit consumed is about 0.05, finally for leisure the total value of leisure is around 8 dollars, average value is about 0.8 and value for the last unit of leisure consumed is about 0.24 dollars.</p>
<p>The marginal values determine decision making, so an economist would say that this person values food the most, then the leisure is in second place and electronics is last since the value for last unit of these goods consumed respectively are 0.5 &gt; 0.24 &gt; 0.05. However, if this person would become richer these values might change, if this person suddenly gets 10000 food endowment then suddenly food becomes tied with electronics and they both will be less valued than leisure. Or alternatively, peoples subjective perception of value could be changed by some persuasive advertising or some social movement etc. Suppose there is some new religion that this person adopts which says enjoying leisure is sinful, then the utility may change to <span class="math-container">$$U = 10F^{0.5} + 3E^{0.2} + 0L^{0.3}$$</span> and suddenly leisure has no value for this individual.</p>

CC BY-SA 4.0
2024-12-11T14:05:12.073Z
Where your answer says "social marginal value" and "social marginal cost", did you mean "private marginal value" and "private marginal cost"?
smcc
CC BY-SA 4.0
2024-12-11T18:47:13.083Z
@smcc no, in aggregate, and in absence of externalities which are not under discussion here, demand represents social marginal benefit/value and supply social marginal cost
1muflon1
CC BY-SA 4.0
2024-12-11T19:48:54.980Z
It just seems strange to me that you specify social marginal value and cost given it is the private values that matter for behaviour.
smcc
CC BY-SA 4.0
2024-12-12T00:57:53.550Z
@smcc 1. I am just following terminology that is in undergraduate textbooks. 2. Social marginal value is result of aggregation of private marginal values, demand is also aggregated over multiple individuals, in that passage I am not talking about individual decision making but about market price that depends on collective behavior of all consumers and suppliers
1muflon1
CC BY-SA 4.0
2024-12-12T05:52:19.490Z
The aggregate private marginal value curve is the aggregation of private marginal values. Of course the private and social marginal values are equal in the absence of externalities, but in the case where they are not, "private" is used to specify the curve/function that does not take account of the externalities. Also, you should be talking about individual decision making in that passage as that is what determines the market outcome. Also, in your last example, it would make more sense for the coefficient on the leisure part negative..
smcc
CC BY-SA 4.0
2024-12-12T10:43:10.990Z
1. Yes precisely and here we don’t talk about externalities. 2. Why would it make sense to for the coefficient on leisure be negative?
1muflon1
CC BY-SA 4.0
2024-12-12T13:13:14.063Z
1. Using "social" here just hinders clarity, especially given you have not specified there are no externalities. People make decisions based on their private marginal costs and values, not on the social marginal costs and values; market supply and demand are based on the private marginal costs and values, not the social. It is weird for you to use "social" instead of "private" (or just the unqualified "marginal value" and "marginal cost") when that is only correct if there are no externalities. Why not use terminology that would be correct regardless?
smcc
CC BY-SA 4.0
2024-12-12T13:13:23.813Z
2. In your example, you write "there is some new religion that this person adopts which says enjoying leisure is sinful". Wouldn't someone doing something they consider sinful hurt them (reduce utility) rather than simply not change utility? At least, it would be quite a coincidence for the benefits from leisure to be exactly cancelled out by the disutility from doing something one considers sinful regardless of the quantity of leisure.
smcc
CC BY-SA 4.0
2024-12-12T14:18:35.927Z
1. I try to use the terminology that is used in the textbook so when someone wants to learn more and follow up on my answer, I see this language in textbooks even outside chapters that only discuss externalities. 2. I also do not really understand your point, in absence of externalities market demand is derived from marginal social benefit and supply is derived from marginal social cost, because without externalities that is what demand/supply represents. Social marginal benefit is literally mathematically derived from
1muflon1
CC BY-SA 4.0
2024-12-12T14:39:00.173Z
Aggregating marginal utilities of individual consumers, so the private decision making is incorporated in. Externalities give rise to difference between private and social marginal benefit/cost precisely because in that case market price does not reflect some benefit/cost to some private person because they can’t participate in the market because of absence of property rights or other issues. But both private and social marginal benefit/cost/value are ultimately based on individual private preferences. Difference is that in case of externalities not everyone is included and without everyone is
1muflon1
CC BY-SA 4.0
2024-12-12T14:44:10.397Z
But they are both concept based on aggregation of individual preferences. Private marginal benefit is not somehow more granular. It actually excludes private benefits/costs that people affected by externality have. But both concepts are derived from bottom up individual preferences/decision making. SMB is not derived top down from some special societal utility function. 3. Ok, that is valid point, but mathematically since consumption of leisure is bounded at 0 it doesn’t make any difference to outcome, any value of a parameter 0>= will yield the same outcome in this example
1muflon1
CC BY-SA 4.0
2024-12-12T15:56:29.377Z
1. You are not using the terminology the way most textbooks use it. 

2. No, market demand is based on private benefits while market supply is based on private costs (of those participating in the market). Just because the private and social benefits/costs happen to be equal under particular assumptions, it doesn't mean you should start calling private benefits/costs social benefits/costs.
smcc
CC BY-SA 4.0
2024-12-12T15:58:13.250Z
I don't disagree with what you have written in your second-to-last comment above. 

In response to your last comment above: Where did I say (or imply) that private marginal benefit was "somehow more granular" or that SMB was top down? And the existence of a SMB does rely on assuming something about aggregation of individual utilities through a "societal utility function" (i.e. a social welfare function).
smcc
CC BY-SA 4.0
2024-12-12T15:58:17.067Z
3. It certainly does make a difference to the outcome whether the coefficient on the leisure term is negative, zero or positive. Why do you say it doesn't? If the coefficient is zero then the marginal utility of leisure is always zero, while if the coefficient is not zero, then the marginal utility is nonzero.
smcc
CC BY-SA 4.0
2024-12-12T18:32:25.930Z
1. I changed it to just marginal benefits and costs, but I still don’t see what was wrong about that statement. I again nowhere imply that this is not a result of private individual behavior, and I did not survey all the textbooks on the market but it is pretty common terminology
1muflon1
CC BY-SA 4.0
2024-12-12T18:32:40.687Z
2. But in this problem for any coefficient on leisure, call it gamma, that satisfies $\gamma \leq 0$ you get corner solution where consumption of leisure is zero, so it doesn’t matter for solution in this case whether $\gamma =0$ or $\gamma<0$
1muflon1
CC BY-SA 4.0
2024-12-09T22:25:13.487Z
2024-12-12T18:31:04.903Z
2024-12-12T18:31:04.903Z
1muflon1
<p>Marginalists oppose the labour theory of value by claiming that the value of a good is equal to its price, and this price is given by the interplay of supply and demand.</p>
<p>However, assuming an ideal market in which the market clears, supply and demand are in equilibrium. How does a marginalist perspective explain, why – say – a bicycle costs more than an apple? In both cases supply and demand are, by assumption, in equilibrium. So how is the level of the price explained in this theory, if commodities embody no value beyond what is given by their price?</p>

<supply-and-demand><marginal><price-theory><marxism>
How does supply and demand in marginalist economics explain price levels?
Pentaquark
# How does supply and demand in marginalist economics explain price levels?

(Asked by: username_0 on 2024-12-09)

Marginalists oppose the labour theory of value by claiming that the value of a good is equal to its price, and this price is given by the interplay of supply and demand.

However, assuming an ideal market in which the market clears, supply and demand are in equilibrium. How does a marginalist perspective explain, why – say – a bicycle costs more than an apple? In both cases supply and demand are, by assumption, in equilibrium. So how is the level of the price explained in this theory, if commodities embody no value beyond what is given by their price?

**Tags:** supply-and-demand, marginal, price-theory, marxism

---

## 1 answers

### Answer by username_1 on 2024-12-09. Score: 2

There are some misconceptions, that when corrected hopefully clear this out.

You claim;

> Marginalists oppose the labour theory of value by claiming that the value of a good is equal to its price, and this price is given by the interplay of supply and demand.

1. Marginalists **do not** claim that value of a good is equal to its price, nor do they claim that value is generally equal to supply and demand equilibrium (see Brue and Grant History of Economic Thought 9th Ed pp 231-248).

In standard price theory supply and demand will meet at the point where marginal value equal marginal costs, but that is based on total market demand, not individual demand (unless we are dealing with special case with only one buyer). For all but last individual in the market the value of a good will typically be higher than the market price (outside some special cases like perfectly elastic demand).

Furthermore, you are implying that the equilibrium price is determining value, whereas, it is exactly the opposite. Social marginal value of a good determine the equilibrium price.

3. Even proponents of the labor theory of value (LTV) thought that prices are determined by supply and demand. Adam Smith and David Ricardo, who are the major developers of LTV, claimed both that prices are determined by supply and demand and that value is determined by labor (ibid pp 61-117). For example, for Smith LTV determined the "long-run" value of a good, but "short-run" fluctuations in prices were explained by fluctuations in supply and demand (also I am using scare quotes because he did not use the modern terminology, but if you read WoN his ideas map relatively well to what we consider short and long run in modern economics).

So the premise of your question is simply incorrect, price is not considered always equal to the value in economics. Nor marginalists or classical economists like Smith thought that price always equals value of a good. Furthermore, it is the other way around, in modern price theory (which is based on marginalism) price is formed from intersection of demand and supply, where demand and supply depend on how much value consumers and producers put on the good, on margin, not the other way around.

> However, assuming an ideal market in which the market clears, supply and demand are in equilibrium. How does a marginalist perspective explain, why – say – a bicycle costs more than an apple?

Marginalists, alongside modern economists, use subjective theory of value, which posits that value is subjective and derived from people's preferences that are either exogenous (given by nature) or potentially endogenous (given by nurture). For example, water has value because people subjectively enjoy the feeling of quenching thirst, or funko pop figurine has value because people subjectively enjoy collecting some pop culture figurines.

The exact value depends on intensity of people's preferences as well as current level of consumption of good. So the explanation is simply that at current level of apple consumption and bike consumption people subjectively think that bikes are more valuable than apples. The insight of marginalism was that value of the good is not same for any volume of consumption but also depends on how much person is already consuming of the said good.

This can be illustrated with an example;

Suppose we have person who's preferences over consuming food (F), electronics (E) and leisure (L) are represented by following utility function;

$$U = 10F^{0.5} + 3E^{0.2} + 4L^{0.3}$$

Moreover, suppose that this person has access to 100 units of food, 20 units of electronics and 10 units of leisure. Furthermore, assume for simplicity that 1 util = 1 dollar.

From this utility and the endowment we can calculate that the total value of 100 units of food for this individual is 100 dollars, average value of food for this individual is 1 dollar and at the margin the value of consuming additional food for this individual is $dU/dE(100)=0.5$ dollar. For electronics the total value is in ballpark of 5.5 dollars, average value is about 0.27 dollars and value of last unit consumed is about 0.05, finally for leisure the total value of leisure is around 8 dollars, average value is about 0.8 and value for the last unit of leisure consumed is about 0.24 dollars.

The marginal values determine decision making, so an economist would say that this person values food the most, then the leisure is in second place and electronics is last since the value for last unit of these goods consumed respectively are 0.5 > 0.24 > 0.05. However, if this person would become richer these values might change, if this person suddenly gets 10000 food endowment then suddenly food becomes tied with electronics and they both will be less valued than leisure. Or alternatively, peoples subjective perception of value could be changed by some persuasive advertising or some social movement etc. Suppose there is some new religion that this person adopts which says enjoying leisure is sinful, then the utility may change to $$U = 10F^{0.5} + 3E^{0.2} + 0L^{0.3}$$ and suddenly leisure has no value for this individual.

> **Comments:**
> **username_2**: Where your answer says "social marginal value" and "social marginal cost", did you mean "private marginal value" and "private marginal cost"?  
> **username_1**: @smcc no, in aggregate, and in absence of externalities which are not under discussion here, demand represents social marginal benefit/value and supply social marginal cost  
> **username_2**: It just seems strange to me that you specify social marginal value and cost given it is the private values that matter for behaviour.  
> **username_1**: @smcc 1. I am just following terminology that is in undergraduate textbooks. 2. Social marginal value is result of aggregation of private marginal values, demand is also aggregated over multiple individuals, in that passage I am not talking about individual decision making but about market price that depends on collective behavior of all consumers and suppliers  
> **username_2**: The aggregate private marginal value curve is the aggregation of private marginal values. Of course the private and social marginal values are equal in the absence of externalities, but in the case where they are not, "private" is used to specify the curve/function that does not take account of the externalities. Also, you should be talking about individual decision making in that passage as that is what determines the market outcome. Also, in your last example, it would make more sense for the coefficient on the leisure part negative..  
> **username_1**: 1. Yes precisely and here we don’t talk about externalities. 2. Why would it make sense to for the coefficient on leisure be negative?  
> **username_2**: 1. Using "social" here just hinders clarity, especially given you have not specified there are no externalities. People make decisions based on their private marginal costs and values, not on the social marginal costs and values; market supply and demand are based on the private marginal costs and values, not the social. It is weird for you to use "social" instead of "private" (or just the unqualified "marginal value" and "marginal cost") when that is only correct if there are no externalities. Why not use terminology that would be correct regardless?  
> **username_2**: 2. In your example, you write "there is some new religion that this person adopts which says enjoying leisure is sinful". Wouldn't someone doing something they consider sinful hurt them (reduce utility) rather than simply not change utility? At least, it would be quite a coincidence for the benefits from leisure to be exactly cancelled out by the disutility from doing something one considers sinful regardless of the quantity of leisure.  
> **username_1**: 1. I try to use the terminology that is used in the textbook so when someone wants to learn more and follow up on my answer, I see this language in textbooks even outside chapters that only discuss externalities. 2. I also do not really understand your point, in absence of externalities market demand is derived from marginal social benefit and supply is derived from marginal social cost, because without externalities that is what demand/supply represents. Social marginal benefit is literally mathematically derived from  
> **username_1**: Aggregating marginal utilities of individual consumers, so the private decision making is incorporated in. Externalities give rise to difference between private and social marginal benefit/cost precisely because in that case market price does not reflect some benefit/cost to some private person because they can’t participate in the market because of absence of property rights or other issues. But both private and social marginal benefit/cost/value are ultimately based on individual private preferences. Difference is that in case of externalities not everyone is included and without everyone is  
> **username_1**: But they are both concept based on aggregation of individual preferences. Private marginal benefit is not somehow more granular. It actually excludes private benefits/costs that people affected by externality have. But both concepts are derived from bottom up individual preferences/decision making. SMB is not derived top down from some special societal utility function. 3. Ok, that is valid point, but mathematically since consumption of leisure is bounded at 0 it doesn’t make any difference to outcome, any value of a parameter 0>= will yield the same outcome in this example  
> **username_2**: 1. You are not using the terminology the way most textbooks use it.   2. No, market demand is based on private benefits while market supply is based on private costs (of those participating in the market). Just because the private and social benefits/costs happen to be equal under particular assumptions, it doesn't mean you should start calling private benefits/costs social benefits/costs.  
> **username_2**: I don't disagree with what you have written in your second-to-last comment above.   In response to your last comment above: Where did I say (or imply) that private marginal benefit was "somehow more granular" or that SMB was top down? And the existence of a SMB does rely on assuming something about aggregation of individual utilities through a "societal utility function" (i.e. a social welfare function).  
> **username_2**: 3. It certainly does make a difference to the outcome whether the coefficient on the leisure term is negative, zero or positive. Why do you say it doesn't? If the coefficient is zero then the marginal utility of leisure is always zero, while if the coefficient is not zero, then the marginal utility is nonzero.  
> **username_1**: 1. I changed it to just marginal benefits and costs, but I still don’t see what was wrong about that statement. I again nowhere imply that this is not a result of private individual behavior, and I did not survey all the textbooks on the market but it is pretty common terminology  
> **username_1**: 2. But in this problem for any coefficient on leisure, call it gamma, that satisfies $\gamma \leq 0$ you get corner solution where consumption of leisure is zero, so it doesn’t matter for solution in this case whether $\gamma =0$ or $\gamma<0$  

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