Marshall Ian Crosses -An Essay

8/3/2019 Marshall Ian Crosses -An Essay

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Title Marshallian Crosses

Subject Economics

Contents

1 Introduction and Summary 2

2 Alfred Marshall Who was this 3Economics Genius

3 Economics Law the Marketplace 4and the Market

4 The Theory of Supply and Demand for 6Price Optimization

5 Applications of Supply and Demand 20

7 Conclusion 228 References 24

9 Definitions of Words Used. 25

1 Introduction and Summary.

This essay starts with a brief biography of A. Marshall the brillianteconomist who thought of and popularized the idea of supply anddemand to optimize price along with other theoretical contributions.He was only brilliant once though a fact regretted by many.The next section deals with economics at large and its relevance toour daily lives. Buying and selling has existed for millennia and has

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formed the basis of wealth creation but todays market is different tothe marketplace of old. What is todays market what does itaccomplish how does it accomplish its task how good is it and finally

what are its failings.The following section deals with the core issue of economics supplyand demand. What is demand - as a definition a law a mathematicalfunction and at market a demand schedule and a demand curve.Movements up and down the demand curve as well as shifts of thedemand curve are discussed and the reasons for such movements.Supply is treated in exactly the same way as demand. When the twocurves are plotted together the intersection is the equilibrium pricefor that good the price when buyer and seller derive maximum

benefit.The next section details examples of the use of supply and demand to

predict the effect of immigration on hourly wage rates and to explainwhy productive efficient farming can lead to protesting angry farmers.The last section deals with a worked example the apartments inPortimao. Because of unfound expectations around 6,000 apartmentshave been constructed many of which remain empty and unsold.Demand has not kept up with the new supply so now there is a largesurplus.The essay ends with a conclusion.References of the articles and books used are quoted.Finally a small dictionary of terms used ends this work.

1 Alfred Marshal Who was he?

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1842-1924

Marshallian curves are named after the world famous economist who

conceived and popularized their use in price optimization. AlfredMarshall was born and brought up in London. Against his fathers

wishes he studied mathematics and physics at Cambridge University[the maths Tripos] where he was a truly brilliant student. Ongraduating he became a lecturer in Moral Sciences specializing inpolitical economy and later in 1884 he became Professor of PoliticalEconomy. In 1890 together with his wife he published his great workPrinciples of Economics (Volume 1). It covered a wide range ofsubjects and had taken 10 years to write. For him economic laws weresocial laws not natural ones. They described the actions of everydaypeople going through life. The book met with world wide acclaim andmade him the preeminent economist of his day. His fanaticalattention to detail together with his temperament meant that manyplanned works including volume 2 were never completed.Nonetheless he is considered one of the founders of neoclassicaleconomics and made lasting and telling contributions to economictheory in several fields. He made economics a respected scientifically

based discipline and his equally brilliant students Keynes and Pigoufollowed in his giant footsteps. His demand functions are still used in

academic papers today 1)

2.Economics and Law What is the Connection.

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As law students we have good reason to study roman law the historyof law etc but the study of economics is vital for all our futures. When

we begin practicing as lawyers every single case we will ever deal withwill have one common theme money. Deaths divorces theftinsurance compensation are all in the end about just that. Sincemoney is an important part of economics this is where to start.

Every human being has 3 basic needs food clothing and shelter. Sadlyan estimated 1 billion(!) people still do not have enough to eat. 2)Every human being also has desires and these desires can never bemet because they are never ending. No country is rich enough tosatisfy all its citizens desires to live like millionaires. The economicresources of every country land labor and capital are limited.Economics then is the study of how to manage these scarce resources

for the benefit of society with the ultimate objective of growing GrossDomestic Product. Increased GDP translates into higher incomes

which in turn mean better health care better education morerecreation and even happier wives.For a millennium or longer the market was the marketplace or fair

where all economic activity took place and where buyers met sellersto do business. A large percentage of the population (50 and more)

was employed on the land and agricultural produce was responsiblefor 80% or more of a countrys GDP. It was only when agriculture

began to be freed of labor in the 19th century that a modern market

economy began to appear. Most societies today are mixed marketeconomies part government decisions part regulated free market. Themarket has become a complex mechanism for coordinating peopleactivities and businesses. It is hardly ever a place it is everywhere itis a means whereby buyer meets seller and everything has a price, the

value of the goods in terms of money. It is todays market whichmakes choices about how best to use the available resources to tryand satisfy the desires of its consumers by answering three basiceconomic questions - what goods to produce how to produce them

and how should the cake be divided up. And this is done painlesslyand easily. What is simply what consumers choose in their daily liveswhich translates into profits for successful companies makingdesirable goods. How is by adopting efficient production methodscost reduction staying with or ahead of competitors to maximizeprofits. For whom depends on peoples incomes, their own market

value. It was Adam Smith the first modern economist in his book

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..The Wealth of Nations who observed that an efficient perfectlycompetitive market economy will squeeze as many goods and servicesas possible out of the available resources 3). But there are many areas

where markets do not lead to an acceptable outcome. A monopoly isone example. Inequitable income distribution is anther. Bankersfrom Merrill Lynch or Lehman Brothers who nearly caused anotherGreat Depression taking home pay worth millions of dollars. And

because of the world wide integration of financial markets and the useof little understood financial instruments the whole world is sufferingfrom their greed.

All of the above has been made possible because of one very ancientinvention money. Money makes the world go round. Everyonetrusts and accepts money. Money is the medium which seals themillions upon millions of contracts between buyer and seller every

day.

We have gone from hunting gathering bartering and grunting tospecialization miniaturization internationalization mass productionand six sigma - a very long way in so short a space of time. 4)

3. Theory of Supply and Demand for Mass Markets MarshallianCrosses 5)

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House prices have gone down recently in Europe where before theyhad just kept going up, the price of oil keeps going up and downregularly while the price of computers has gone down and down.

What are the reasons for these price variations. Economics has apowerful tool to explain these price movements and it is the theory ofsupply and demand. Quite simply changes in supply or demand givesrise to changes in output and therefore price. What then is demand ?

Demand is the willingness of a consumer to purchase a good or aservice within a certain period of time.

This willingness can be stated in the form of the law of demand. It isone of the most famous laws in economics and one on which

economics is based on and for consumers it is part of life and is putinto practice on a daily basis .

Briefly the law states-

The price P(x) of a good is related to the quantity demanded Q(x) forthat good all other things being equal more specifically as the pricegoes up demand goes down and as the price goes down demand goesup. (Veblen and Griffen goods excepted )

Economists believe very strongly in this law since it is so plausible.When grapes are in season and the price is low consumers buy themby the ton but out of season their purchase is more limited. Another example is shown in the figure below . 3)

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Figure 1

Figure 1 shows the number of computers bought since 1963 (x axis)and the price paid (y axis). It is as example of how the price of chipsin computers has decreased exponentially while their processing

power has increased similarly leading to the todays explosivedemand for billions of computers. It is an example of a demand curve.

This price P(x) demand Q(x) relationship can be expressedmathematically

P(x) = f [Q(x) ] or alternatively Q(x) = f [P(x) ]

This is a function a relationship between two variables.It is a demand function since it relates price to demand.It is a general demand function since it covers all consumer goodssuch as chalk cheese houses cars but each good will have its ownunique function. It applies to individuals as well as mass marketssince markets are made up of individual consumers.

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Demand of course is not just a matter of price. A large number ofother factors will influence the quantity demand for a good at a givenprice. They are:

- the average income of a consumer or group income, probablythe most important element of demand. When people havemore money they tend to spend it. (Y)

- the price and availability of substitutes (Ps)- the number of consumers in other words the size of the market

(N)- special tastes of consumers such as cigarettes or alcohol (Z)- special influences such as availability of credit, consumer

expectations, educational level, changes in weather orgeography ( S )

When these other variables are introduced the function becomesmore complex )

Q(x) = f P(x) [Y Ps N S Z] con 6)

However the purpose of this and most studies is quantity demandedQ(x) as a function of price P(x) two variables (a partial equilibrium),and so all the other variables that affect demand are taken as beingconstant.The actual relationship between price and quantity demanded is

given by the demand schedule this is a table or list showing thenumber of unites of a good that a potential buyer will purchase or haspurchased at a number of varying prices during a particular timeperiod. Take shoes as an example. Below is a table of the number ofshoes a shop sells in a week at a given price. The price has beenarrived at by market analysis and pricing experiments.

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Table 2. Demand Schedule for Shoes. 7)

When the numbers in Table 2 price P(s) and quantity Q(s) are plottedon a graph a curve is obtained, the demand curve.

Figure 2 7)The curve in Figure 2 is a linear demand curve a straight line.

Any straight line on a graph can be described mathematically by

a function of the formy=mx +c

Therefore by analogy the demand function for shoes is

P(s) = mQ(s) + c or more precisely P(s) = 140-4Q(s)

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------------The demand function summarizes the relationship betweenthe demand schedule and the demand curve-----------------------------

The slope m (-4) is negative since the relationship is inverse and is animportant metric for calculating price elasticity. c (140) the intercepton the y axis is the price when demand is zero and c/m (35) theintercept on the x axis is where all the other variables are heldconstant. Most demand functions and demand curves are much morecomplex.

A change in demand brought about by price alone means movementup and down the curve - a change in quantity demanded.

The figure below is a demand curve for plastic ducks showing

movement along the curve.

Figure 3 8)Demand Curve for Plastic Ducks

Suppose our original P(ducks) =P1 and demand Q(ducks) =Q1The demand for plastic ducks is referred to as elastic. That meansdemand is sensitive to price change a small change in price up ordown will effect a big change in demand down or up.[The price elasticity of demand

Ed = % change in quantity/% change in price ]

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A decrease in price to P2 increases quantity to Q2Total revenue equals price times quantity (TR =PQ.)

Before price increase TR1 =P1Q1 After price increase TR2 = P2Q2However Q2 is Q1 thus P2Q2 Q1P1So by reducing the price total revenue TR increasesBy analogy increasing the price reduces revenueIn general

- if the elasticity of a good equals one [Ed = 1] then pricemovements along the demand curve will have no effect onrevenues (demand is unit elastic)

- if the elasticity of a good is less than one [Ed 1] revenueswill decrease as the price decreases and increase as the price

increases (demand is inelastic) Most day to day consumer goodsare inelastic

- if the elasticity of a good is greater than one[ Ed 1 ] priceincrease will decrease revenue and price decrease will increaserevenue (demand is elastic)

Picture 1Plastic Duck 9)

When there is a change in demand bought about by something otherthan price for example peoples income increases and they buy moreducks then the whole demand curve shifts in this case to the right.

The curve has shifted.

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Figure 4 8)Shifted Demand Curve for Beer.

All distilled alcohol now goes into transport while wine has beenwiped out by disease so practically the only alcohol now available isbeer. Hence there has been a shift in the demand for beer.

Supply the counterparty to demand can be treated in exactly the sameway as demand above

What then is supply ?Supply is the amount of a commodity available for meeting a demandor for purchase at a given price.

The law of supply states that, all other things being equal, as the priceP(x) of a good increases so will the quantity supplied Q(x) increase.

Mathematically the general supply function has the following form

P(x) = f [Q(x) ] or alternatively Q(x) = f [ P(x) ]

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Table 5 Figure 5 10)Supply Schedule Supply Curve

for Wheat for Wheat.

Figure 5 shows linear dependence a straight line. It also shows thatthe slope m of this line is positive since both variables P(x) and Q(x)increase or decrease in step. Again mathematically the function of astraight line is y=mx +c . So the demand function for wheat is

P(w)=mQ(w) + c or more precisely P(w) = 1+0,1Q(w)

When price alone changes supply movement is up or down the supply

curve. But supply is dependant on a number of other factors not justprice

- input costs, can shift the curve left or right depending onwhether the costs increase or decrease production.

- number of sellers will result in more supply, curve will moveright.

- technology means efficiency which means increased supply- prices of related goods may cause a left shift since resources are

allocated to other more profitable sectors.- expectations, reduced supply in anticipation of a price increase.

Increased supply during specific periods of the year toanticipate demand.

When one of the above factors changes supply the whole supply curvewill move left or right (shift) depending on whether supply hasincreased or decreased.

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Figure 6.Supply Curve for Carp at Christmas Time in Poland 11)

Figure 6 shows a shifted supply curve for carp (increased number ofsellers and expectations). In Poland at Christmas carp forms a veryimportant part of Christmas Eves dinner. No meal is complete

without this specific fish

Command economies like those that existed in Eastern Europebetween 1945 and 1990 were a tragedy especially for consumers.Demand for consumer goods was never ending practically infinite butsupply was minimal or non existent. Cars telephones apartmentseverything and anything. Even food production was limited althoughno one ever went hungry. Exotic fruit such as bananas or oranges

were never seen while a tin of sardines was a great delicacy.In a normally functioning market economy supply and demand areSiamese twins 2 sides of a coin one cannot exist without the other.Consumers buy on price and producers supply on price. So market

equilibrium comes about when supply balances out demand. At theequilibrium price the amount buyers want to buy exactly equals theamount producers want to supply and sell.To quote 3)Market equilibrium comes at the price at which quantity demandedequals quantity supplied. The equilibrium price is called the marketclearing price all the supply and demand orders are fulfilled.

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And the equilibrium price comes at the intersection of the supply anddemand curves. Below the intersection point demand will be greaterthan supply and there will be shortages above this point demand willexceed supply and there will be a surplus. This is shown in Figure 7.

below. The demand curve and the supply curve for boxes of cereals

Figure 7. 3)Supply and Demand Curves for Cereals vs. Price

Only at equilibrium can both the buyer and seller can go home for agood nights rest. Above the market clearing price the followingscenario will occur .

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Figure 8 8)

Supply and Demand Curves for Piglets

In figure 8 at price P1 the demand for piglets is Q1 but the sellerwants to sell Q2 piglets. Result surplus.

Below the equilibrium price another situation arises

Figure 9 8)Supply and Demand Curves for Piglets

In figure 9 demand for piglets at price P1 is Q2 but the supplier willonly supply Q1. Result shortage. No more pork chops today.

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Supply and demand curves apart from determining optimum pricecan also be used to predict what will happen to the equilibrium point

when there is a change in demand or supply

Figure 10 3)Demand and Supply Curves for Oranges vs. Price

Effect of Demand Change.

Algarve oranges are delicious. Recently scientists discovered that theycontain Rejuvenol a chemical which makes wrinkles disappear.Figure 10 shows the increase in demand the right shift in the demandcurve as a result of the news.The curve has shifted from DD to DDThe equilibrium point has moved from E to ESome months later a correction was added at least 5 kilograms offresh oranges had to be consumed each day for the process to work.The demand curve shifted back from DD to DD

The equilibrium point also moved back from E to E

Summarizing the above for a good that is price inelasticwhen demand increases price up quantity up TR up.when demand decreases price down quantity down TR downwhen supply increases price down quantity up TR downwhen supply decreases - price up quantity down TR up

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Interpreting supply demand data needs caution. To take an examplesuppose the price of your daily hot breakfast croissant goes downconsiderably(2 for the price of 1) Is this because of a change in thedemand side or supply side or a change in both. More data is needed

before a conclusion can be drawn. If the price has decreased togetherwith an increased supply the probable cause is an increase in quantitydemanded movement along the demand curve (a bumper harvest )This is shown in the figure below .

Figure 11 3)Demand and Supply Curves vs. Price for Croissants

Movement along demand curve as one explanation of price decrease.

Equilibrium has moved from Eto E because of a shift in supplyAlternatively if price has decreased along with an a decrease in

demand the probable reason is a left shift in the demand curve(croissants are very fattening with butter. ) By following theequilibrium point the reasons behind a price increase or decrease can

be understood more easily.

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Returning to where we stopped in section 3 we stated that it is themarket that decides the what the how and the for whom And it is withthe 2 instruments of supply and demand that this rationing isachieved. The rewards are huge (Bill Gates) but failure is bankruptcyand possible ruin for the whole family. In a very few case it can meanthe life of a billionaire until the culprit is finally caught. I still cant

believe it. He was such a fine outstanding member of society .Everyone thought very highly of him.( Bernard Madoff and his Ponziscam.)

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5. Applications of Supply and Demand.

The ever emotive problem of immigration and its sister race relationsis a continual headache for all western societies. Politicians can loosetheir votes and racialist parties such as the BNP can become verypopular finding the right answer to the question to allow or not toallow more immigration. But does immigration do what people fearreduce hourly wage rate ? The economist would answer maybe. Ifimmigration is directed to areas of unemployment then the result isan increase in work force and a decrease in hourly wage rate (shift inthe supply curve).If immigration is directed to areas in economicexpansion which is the norm then there will be no effect since the

excess supply will be absorbed by a shift in the demand curve.

Another very good example is the paradox of the highly motivatedefficient productive farmer who is the poorer as a result.Farmers claim to be poor some possibly are but most are not. Fortheir size 3% of the total workforce they have a very big say in theirown welfare. When confronted their protests are very effective andspectacular tons of rotting farm produce on highways or in front ofcity hall. But their efficiency and productivity has not brought themthe expected rewards.

Figure 12 3)

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Agricultural Output and Demand vs. PriceBefore and After Enormous Productivity Increases

Figure 12 shows a plot of agricultural food production and demand vs.price for the industrial nations of Western Europe and North

America. Over many years farm productivity has soared mechanization super efficient seeds fertilizers pesticides herbicideshave all combined to give yields of 150 bushels per acre (approx 4tons) for wheat. This is shown by the supply curve shift from SS toSS Demand has not kept pace it has shifted only slightly right fromDD to DD. People cannot eat everything that is being produced. Theresult of the supply and demand curve shifts is that a new equilibriumE has been established (E moved to E) This is very bad news forthe farmer. Demand for wheat a commodity is inelastic (section 3) sothat when price goes down total revenue TR goes down. The poor

farmer sits on his mountain of grain and wonders what have I donewrong.The answers to his problem are not in his hands. He must be paid toproduce less (production quotas) or the government must interveneto buy up all his produce at a guaranteed price (a further shift in thedemand curve) to stabilize the market and prevent protest. Thefamous EU butter mountain is an excellent example of this policy inaction.

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7. Conclusions.

Economics is still a very young science - mathematics and physicshave been around for thousands of years while economics is barely200 years old although it fair to say that basic economics has beenpracticed since homo sapiens time . It has a lot of catching up to do.Unfortunately our very existence lies in the hands of economists intheir theories and their models. The near total economic meltdown ofthe worlds economies last year was prevented by Ben BenackeChairman of the Federal Reserve who was the right guy in the rightplace at the right time. Keynes had all the answers in his 1936 bookThe General Theory of Employment. We were very lucky.

Unfortunately again there were only one or two prophets warning usthat the American economy was heading for a mega crisis. But no one

was listening. No one had a model for what was about to happen.The complex financial instruments (cdss cdos) used but littleunderstood were just another example of our faith and ignorance.Now after 30 years of spectacular economic growth lean times areawaiting everyone. 10 % unemployment in the USA the economies ofGreece Italy Spain and Portugal in a fragile state and mountains andmountains of debt to be paid back by future generations. The futurelooks uncertain. Greed is good, might is right. Economics still has a

way to go.

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8 References.

Alfred Marshall (http//en wikipedia.org/)Concise Encyclopedia of Economics Alfred Marshall(www.econlib.org/)Economic History of Economic Theory and Thought.(www.economictheories.org/)

Alfred Marshall Biography 1842-1924 (social.jrank.org/pages/2408 )1.Marshals Theory of Value and the Strong law of Demand Brownand Calsamiglia. Feb 2003 . Cowles Foundation Discussion Paper.Economy Professor Alfred Marshall (www.economyprofessor.com)2. The Economist November 2009

Economics for Dummies (www.strom.clemson.edu/)3. Economics Samuelson and Nordhaus 18th International Edition

Adam Smith (http//en wikipedia.org/)Money in the Middle Ages ( www.boisestate.edu/)The Middle Ages : the Feudal System (library.thinkquest.org/Top 10 companies that have gone bust (www.helium.com)4.History of the Market System (www.zeromillion.com/)5.Principles of Economics Alfred Marshall (www.econlib.org/)Concise Encyclopedia of Economics Demand (www.econlib.org/ )6. Economics Study Guide (www.pinkmonkey.com/)

7. Pricing in Mass Markets. 3.2 Demand (www.mbs.edu/)8. Investopedia (www.investopedia.com/)9.( www.frenchduck.com/)Pricing in Mass Markets 3.3 Price Elasticity ( www.mbs.edu/)Spark Notes :Elasticity :Elasticity (www.sparknotes.com/)10. Pricing in Mass markets 3.4 Supply (www.mbs.edu/)11. NetMBA (www.netmba.com/)Glossary of Political Economic Terms (www.auburn.edu/)Supply and Demand (http// en.wikipedia.org/)

Building the Demand Curve (http//en wikiversity.org/)Law of Demand (http//en.wikipedia.org/)Demand Curve (http//en.wikipedia.org/)Personal recollections of life in Eastern Europe

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9 Definition of Words used

Aggregate total , sum of individual components.BNP fascist political party; the British National PartyCapital One of the 3 factors of production - durable produced goodsthat are in turn used in productionCDS credit default swap , a contract ,a derivative a complexfinancial instrument which is to insure against default.CDO collateralized debt obligation, a type of structured asset

backed security.Change in demand see textChange in quantity demanded see text.

Command economy a centrally planned economy where alleconomic decisions are determined by government directive.Communism previously a one party state that owns and controls allthe means of production. The Chinese version is somewhat changed.Elasticity see the text.Griffen good a consumer staple whose quantity rises as its pricerises.Gross Domestic Product (real ) the quantity of goods and servicesproduced by a nation in a year.Land one of the 3 basic factors of production taken to include

agriculture industrial and natural resources taken from above orbelow , wind oil etcMarket market clearing price market economy - see text.Macroeconomics analysis of the behavior of the economy as a whole

with respect to all aggregate economic variables.Microeconomics analysis of the individual elements of an economy.Ponzi scheme a fraudulent investment paying large returns usingfresh money coming from new investors who have been deceived.6 Sigma A method of changing a companys production or business

so that its long term defects fall below 3,4 per million.Scarcity something that is not freely available.Substitutes goods that compete with one another.The Federal Reserve the American central bank.

Veblen good a high status good where the high price is part of theattractiveness of the good. Reducing price reduces demand.

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Marshall Ian Crosses -An Essay