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Chapter 10: Alfred Marshall and Neoclassical Economics. Questions for Review, Discussion and Research (pp. 302-03) 1, 3, 4, 5, 6, 10. His first University degree and teaching position was in mathematics Was influenced by two Continental mathematical economists: Cournot Von Thunen. - PowerPoint PPT Presentation
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Chapter 10: Alfred Marshall and Neoclassical Economics
Questions for Review, Discussion and Research (pp.
302-03)
1, 3, 4, 5, 6, 10
His first University degree and teaching position was in mathematics
Was influenced by two Continental mathematical economists: Cournot Von Thunen
Before he set out to translate Ricardian and Millian economics into mathematical forms
He combined his mathematical training with his background in history, his understanding in economic theory and his strong humanitarian interests
Scope of Marshallian Economics
“Study of mankind in the ordinary business of life”
He sought to correct the approaches of Jevons and Menger who seemed to regard “The theory of consumption as the scientific basis of Economics”
Jevons believed that wants and desires were inner impulses. They spring from within and are independent of our activities
Marshall appreciated the interconnections between consumer wants and producer activities
Marshallian Method
Understood history and the work of economic historians
Believed that the chief defect of classical economics was to recognize that society is constantly evolving via technological change, innovation, etc.
He wrote his publications for the educated lay reader and avoided precise definition in the main body of his books
Understanding the Complexities of Modern Economies
Believed that complex and subtle relationships existed between all parts of the economy
Overhead pp. 279-280
Causes do not instantan- eously produce final effects but take time to work themselves out
Four Time Periods
Not chronological time but based on time required to adjust quantities (ie. supply, demand etc.)
1. Market – Very short run Supply is fixed and
cannot respond2. Short-run – at least one
factor input is fixed (usually real capital) and the others are variable
1. Long-run – All factor inputs are variable
2. Secular – Aggregate variables such as population or technology are variable
Marshallian Supply and Demand Curves
Interrelationships and mutual causation are at the core of the early neoclassical theory of values along with intertemporal considerations
Overhead pp. 282 Marginal analysis had been
misunderstood by early neoclassical economists
Marginal values (whether cost, utility or productivity) were credited with determining the value of the whole
Overhead pp. 283
Marshall claimed that Ricardo recognized the role of demand but concentrated his analysis on the more difficult analysis of production
His own contribution of introducing time was merely an extension and development of Ricardian economic thought
Consumer Demand for Final Products
The influence of demand on price determination was studied by avoiding difficulties with his ceteris paribus assumptions
His most important contribution was a clear formulation of the concept of own price elasticity of demand
Consumer Demand for Final Products
Marshall followed Jevons by adopting his additive utility function which ignores substitution and complimentary relationships
In Marshall’s analysis, an explanation of the demand curve is the main task of demand theory
Marshall also accepted two assumptions credited to Gossen
Consumer Demand for Final Products Cont’d
1. Gossen’s first law Diminishing marginal
utility2. Gossen’s Second Law
The equilibrium conditions for an individual consumer is
MUA = MUB = … = MUN = MUM PA PB PN
Where MUM is the marginal utility of money defined as the marginal utility received from the last dollar of product
Consumer Demand for Final Products Cont’d
If savings are included as a product, then MUM is the utility received from the last dollar of income and the marginal utility of product A is MUA = PA * MUM
Problems with this analysis are summarized on pages 285 and 286
Concept of Consumer Surplus
Concept of the marginal utility of money being constant for small changes in price opened the door for welfare economics using the idea of consumer surplus
Fisher’s development of a non-additive utility function and other criticisms moved Marshall to emphasize the assumptions of a constant marginal utility of money is valid and a close approximation for equilibrium around price C
Taxes and Welfare
Read pp. 288-290 on your own
Marshall and the Early Neoclassical Theory of Distribution
Acknowledged the theoretical soundness based on marginal productiveness
The demand for factor inputs was views as a derived demand and he measured MPL by computing the net product of labour at the margin
Overhead pp. 292
Marshall accepted the Wicksteed-Flux conclusion that the total product was exhausted in the long run equilibrium of firms operating in competitive input and output markets
Concept of Quasi-Rent For Factors of Production
Provides insight into the operation of input markets in the process of adjustment to long-run equilibrium and resolving earlier debates
1. Classical Economists Payment for labour and
capital (but not land) were price determining so the price at final goods depends upon the costs of production (wages, interest) at the margin
Prices are determined in the long-run by supply side effects
Concept of Quasi-Rent For Factors of Production Cont’d
2. First Generation of Neoclassics
All payment for factor inputs (wages, interest, rent) are price determined
Marshall’s framework of time periods and the elasticity of supply of factor inputs helped to resolve the dispute
Issue of land rent entering into the determination of price depended on the existence of unsettled land and a moving agricultural frontier
Overhead pp. 293 Marshal also examined the
short-run returns of labour, management and capital in terms of quasi-rents
Overhead pp. 295
Stable Equilibrium in Marshall and Walras
Marshall’s explanation of equilibrium processes in competitive markets focuses on quantity adjustments, by suppliers and consumerOverhead pp. 296, 297
Read the discussion of unstable equilibrium on your own
Marshall’s Contributions to Macroeconomics
Established Cambridge School of Monetary Economics with its focus on the influence of monetary forces an the general price level
Marshall accepted J.S. Mills view that economic fluctuations were caused by business confidence and that depressions were not rooted in any fundamental contradictions within the economic system
Summary
Marshall viewed his theories as a continuation of Smith, Ricardo, and J.S. Mill
These classical writers al presumed that economic theory was universally true and assumed that human nature and behaviour was antecedent to culture
The Marshallian scope and methodology was a product of the controversies of the late 1800’s
Overhead pp. 301