Alfred Marshall

1
Alfred Marshall

• 1842-1924

2
Biography

• Son of a bank cashier. Father pushed him to the
  point that had it not being for trips to an aunt
  in the Summers he would have ended up as another
  J.S. Mill.
• He did not make friends and his two favorite
  hobbies (math and chess) were prohibited by his
  father

3
Biography (continuation)

• Refused Oxford scholarship (ministry)
• Went to Cambridge to study mathematics
• Had to leave Cambridge in 1877 since he decided
  to marry (just like Malthus)
• Bristol took him (have a page dedicated to him in
  their Web-page)
• Published Economics of Industry with his wife
  Mary Paley

4
Biography (continuation)

• In 1884 returned to Cambridge
• In 50 years of writting he produced 82
  publications including
• 9 editions of Principle of Economics
• 5 editions of Industry and Trade
• 2 editions of The Economics of Industry
• Money, Credit and Commerce appearing in 1923
  (year before his death) only appeared in one
  edition

5
Alfred Marshall (cont.)

• Father of modern orthodox microeconomic theory
  (neoclassicism) along with Walras
• Structural basis of undergraduate economic theory
  (Walras more adequate for graduate classes)
• Translated Ricardo and J.S. Mill economics into
  mathematics

6
Alfred Marshall (cont.)

• Father of modern orthodox microeconomic theory
  (neoclassicism) along with Walras
• In defining Economics he stated
• Political Economy or Economics is a study mankind
  in the ordinary business of life it examines the
  part of the individual and social action which is
  most closely connected with the attainment and
  with the use of the material requisites of well
  being (text 274)

7
Alfred Marshall (cont.)

• Forged the principles of supply and demand
  analysis
• Religious and humanitarian convictions
• Concern for the poor and desire to improve the
  well-being of society through economics (focused
  on applied theory)

8
Alfred Marshall (cont.)

• Initiated not just modern economics but THE
  PROFESSION
• Students J.M. Keynes and Joan Robinson
• TEXT BOOK LEGACY
• At the end of his life he began to deal in what
  today we call Macroeconomics

9
Alfred Marshall (cont.)

• Economics is not a body of concrete truths, but
  an engine for the discover of concrete truth.
• Published findings in Principles of Economics
  (1890) after 20 years of work, with mathematics
  and graphs in footnotes and appendices so as to
  be understandable to businessmen and society as a
  whole

10
Alfred Marshall (cont.)

• Refused to take rigid positions on theoretical
  and methodological issues.
• Practiced the art (rather than the science) of
  economics (related the insights of the positive
  science to the goals determined in the normative
  branch).

11
Alfred Marshall (cont.)

• Marshall on Method
• The Scope and Method of Political Economy (1891)
• Consumer wants proceed from activities (allies
  him more closely with classical emphasis on
  supply than with neoclassical emphasis on
  demandJevons, Menger)
• Suggested economists start with preliminary
  demand, proceed to activities and supply, then
  return to demand.
• Observe complex interconnections between wants
  and activities

12
Alfred Marshall (cont.)

• Marshall on Method
• The Scope and Method of Political Economy (1891)
• Consumer wants proceed from activities (allies
  him more closely with classical emphasis on
  supply than with neoclassical emphasis on
  demandJevons, Menger)
• Suggested economists start with preliminary
  demand, proceed to activities and supply, then
  return to demand.
• Observe complex interconnections between wants
  and activities

13
Alfred Marshall (cont.)

• Marshall on Method
• Chief task of economics - elimination of poverty.
• Believed in the possibility of increasing the
  well-being of the working classes (as opposed to
  classicals)

14
Alfred Marshall (cont.)

• Marshall on Method
• Attempted to Merge Theoretical, Mathematical, and
  Historical Approach
• However he saw mathematics to have limitations

15
Alfred Marshall (cont.)

• Marshall on Method
• I know I had a growing feeling in the later
  years of my work at the subject that a good
  mathematical theorem dealing with economic
  hypotheses was very unlikely to be good
  economics and I went more on the rules

16
Alfred Marshall (cont.)

• Marshall on Method
• (1) Use mathematics as a shorthand language,
  rather than an engine of inquiry
• (2) Keep to them until you are done
• (3) Translate to English
• (4) Then illustrate by examples that are
  important in real life
• (5) Burn the mathematics

17
Alfred Marshall (cont.)

• Marshall on Method
• (6) If you cant succeed in (4), burn (3), This
  last I did often (TEXT 278).
• Of course, trying to merge three methodologies
  had the result of being disliked by all

18
Alfred Marshall (cont.)

• Critics
• German English historically oriented economists
  found his economics too abstract and rigid.
• Veblen and institutionalists attacked his method.
• Advocates of abstract mathematical methodology
  criticized his historical method and resented his
  remarks about the limitations of theory and
  mathematics

19
Alfred Marshall (cont.)

• Marshall defined 4 time periods
• Market period - Very short period in which supply
  is fixed (perfectly inelastic). No reflex action
  of price on quantity supplied
• Short run - A period in which the firm can change
  production and supply but cannot change plant
  size. Higher prices cause larger quantities to
  be supplied (upward sloping supply curve).

20
Alfred Marshall (cont.)

• Two components of total costs of the firm
• prime costs - costs that vary with output (also
  called special or direct costs)
• supplementary costs - costs that do not vary with
  output (fixed costs)

21
Alfred Marshall (cont.)

• Long run - Plant size can vary and all costs
  become variable.
• Supply curve becomes more elastic because of
  firms adjustment in plant size and can take 3
  forms
• Increasing costs - slopes up and to the right
• Constant costs - perfectly elastic (horizontal)
• Decreasing costs - slopes down and to the right
  (unusual situations)

22
Alfred Marshall (cont.)

• Secular period - (Very long run) Permits
  technology and population to vary

23
Alfred Marshall (cont.)

• Controversy over whether cost of production
  (classical)or utility (marginal utility school of
  Jevons, Menger and Walras ) determines price.
• Marshall believed that influence of time and
  awareness of the independence of economic
  variables would resolve the question.
• Demand curve for final goods slopes downward and
  to the right and individuals will buy larger
  quantities at lower prices.

24
Alfred Marshall (cont.)

• Supply curve depends on the time period under
  analysis.
• The shorter the period, the more important the
  role of demand in determining price.
• The longer the period, the more important the
  role of supply. In LR in constant costs exist so
  that supply is perfectly elastic, price will
  depend solely on cost of production

25
Alfred Marshall (cont.)

• Marshall on Demand
• Most important contribution to demand theory was
  his clear formulation of the concept of price
  elasticity of demand.
• Price and quantity demanded are inversely related
  to each other demand curves slope down and to
  the right.
• Degree of relationship is shown by the
  coefficient of price elasticity

26
Alfred Marshall (cont.)

• Elasticity of Demand
• eD percent change in quantity demanded -
  ?q / ?p
  
  percent change in price
  q p
• Coefficient is negative b/c of inverse
  relationship by convention the coefficient is
  shown as positive by adding the negative sign to
  the right side of the equation.
• If price decreases by 1 percent and quantity
  demanded increases by 1 percent, total revenue is
  unchanged, and the coefficient value is 1. The
  commodity is said to be price elastic..

27
Alfred Marshall (cont.)

• If price decreases by a given percentage and the
  quantity demanded increases by a smaller
  percentage, total revenue decreases and the
  coefficient lt 1. The commodity is price
  inelastic
• Marshall also applied the elasticity concept to
  the supply side.
• Marshall was 1st to express the concept of
  elasticity with mathematical precision and is
  considered its discoverer.

28
Alfred Marshall (cont.)

• Marshall ignored substitution and complementary
  relationships (utility received from consuming
  good A depends solely on the quantity of A
  consumed, not on the quantities of other goods
  consumed).
• This gives an additive utility function
  U f1qA f2qB f3qC . . . fnqn
• More generalized utility function (F.Y. Edgeworth
  Irving Fisher) now general used
  U f (qA, qB, qC, . .
  . , qN )

29
Alfred Marshall (cont.)

• Consumers surplus - the difference between the
  total expenditures consumers would be willing to
  pay and what they actually pay.

MU
Consumer Surpluss
Demand
Quantity
30
Alfred Marshall (cont.)

• Marshall on Supply
• Most important contribution to theory of supply
  was his concept of the time period, particularly
  the short run and the long run.
• Spoiling the market - selling at low prices today
  and preventing the rise of market prices
  tomorrow, or selling at prices that incur
  resentment of other firms in the industry.
• True cost curve for SR is not marginal cost curve
  but a supply curve to the left of the marginal
  cost curve (here, Marshall dropped the assumption
  of perfect competition).

31
Alfred Marshall (cont.)

• Marshall on Supply
• LR forces that determine the shape and position
  of firms cost and supply curves
• Internal forces - as the size of firm increases,
  internal economies of scale lead to decreasing
  costs and internal diseconomies result in
  increasing costs.

32
Alfred Marshall (cont.)

• Marshall on Supply
• LR forces that determine the shape and position
  of firms cost and supply curves
• External forces - external economies (not clear
  whether to firm or industry) result in downward
  shift of firm and industry cost and supply curves
  as industry develops.
• Major causes of external economies are the
  reductions in costs that take place for all firms
  in an industry when all firms locate together and
  share ideas and attract subsidiary industries and
  skilled labor to the area.

33
Alfred Marshall (cont.)

• Stable and Unstable Equilibrium
• Stable equilibrium is achieved when any
  displacement from equilibrium will produce forces
  returning the market to equilibrium
• Unstable equilibrium is possible when supply
  curve in downward sloping. If price or quantity
  attain equilibrium values, they will remain
  there, by if system is disturbed it will not
  return to these equilibrium values.

34
Alfred Marshall (cont.)

• His dabbling into Macroeconomics
• Economic Fluctuations, Money and Prices
• Marshall studied influence of monetary forces on
  general level of prices.
• Money, Credit and Commerce (1923)

35
Alfred Marshall (cont.)

• His dabbling into Macroeconomics
• Suggested 2 public policies to combat depression
  and unemployment
• Control markets so that credit is not
  over-expanded in periods of rising business
  confidence b/c over-expansion may lead to
  recession.
• If depression occurs, governments can help
  restore business confidence by guaranteeing firms
  against risk