Transcript Chapter 10

Chapter 10: Alfred
Marshall and
Neoclassical
Economics
Questions for Review, Discussion
and Research (pp. 302-03)
1, 3, 4, 5, 6, 10
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His first University degree
and teaching position was in
mathematics
Was influenced by two
Continental mathematical
economists:
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Cournot
Von Thunen
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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
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“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”
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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
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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
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Believed that complex and
subtle relationships existed
between all parts of the
economy
Overhead pp. 279-280
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Causes do not instantaneously produce final effects
but take time to work
themselves out
Four Time Periods
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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
respond
2. 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
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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
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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
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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
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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 utility
2. Gossen’s Second Law
 The equilibrium conditions for
an individual consumer is
MUA = MUB = … = MUN = MUM
PA
PB
PN
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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
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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
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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 nonadditive 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
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Read pp. 288-290 on your
own
Marshall and the Early
Neoclassical Theory of
Distribution
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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
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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
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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
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Prices are determined in the
long-run by supply side
effects
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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
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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 shortrun returns of labour,
management and capital in terms
of quasi-rents
Overhead pp. 295
Stable Equilibrium in
Marshall and Walras
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Marshall’s explanation of
equilibrium processes in
competitive markets focuses
on quantity adjustments, by
suppliers and consumer
Overhead pp. 296, 297
Read the discussion of
unstable equilibrium on your
own
Marshall’s
Contributions to
Macroeconomics
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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
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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
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The Marshallian scope and
methodology was a product
of the controversies of the
late 1800’s
Overhead pp. 301