Alfred Marshall's Contributions to Economic Analysis

 
Alfred Marshall (1842-1924)
 
ECO54 History of Economic Thought
Udayan Roy
 
Alfred Marshall (1842-1924)
 
Principles of Economics
, 1890
Free PDF download
 
Alfred Marshall
 
2
 
Sources: Alfred Marshall
 
The Ordinary Business of Life 
by Roger Backhouse, pages 177-
182
The Worldly Philosophers 
by Robert L. Heilbroner, Chapter VII
(The Victorian World and the Underworld of Economics), pages
205-212
New Ideas from Dead Economists 
by Todd Buchholz, Chapter
VII (Alfred Marshall and the Marginalist Mind)
 
Alfred Marshall
 
3
 
Alfred Marshall
 
Popularization of Supply-Demand Analysis
 
Marshallian Cross; Marshall popularized the use of the familiar
supply-demand diagram
Popularization of consumer surplus and producer surplus
 
4
 
Alfred Marshall
 
Reciprocal Demand
 
Graphical analysis of two-country trade
 
5
Offer Curve: Country 
A
Alfred Marshall
No trade
No-trade terms of trade
6
 
Offer Curve: Country 
B
 
Alfred Marshall
 
7
 
Offer Curve: Country 
B
 
Alfred Marshall
 
8
 
Offer Curve: Country 
B
 
Alfred Marshall
 
9
Free Trade: two-country outcome
Alfred Marshall
Offer Curve of
Country 
A
.
Offer Curve of
Country 
B
.
Free Trade terms
of trade
Good 
X
: exports of 
A 
and imports of 
B
Good 
X
: imports of 
A 
and
exports of 
B
10
 
Alfred Marshall
 
Elasticity of Demand
 
Elasticity of Demand formula, 1882
Marshall also discussed the 
determinants
 of the elasticity of
demand
High price (relative to buyers’ incomes)
Availability of substitutes
 
 
11
 
Elasticity of Supply
 
Supply elasticity depends on time available to producers to respond to a
price change
Market period: perfectly inelastic supply, price is determined entirely by demand
in the case of perishable goods and by expected future prices in the case of
durable goods.
Short run: rising supply curve, price is determined by both supply and demand,
usage levels of some resources are fixed
Long run: usage levels of all resources are variable, supply could be a falling
curve
Very long period: changes in knowledge, population and capital cause long run
prices to change gradually
 
Alfred Marshall
 
12
 
Alfred Marshall
 
Economies of Scale
 
Internal and external economies of scale
Internal economies: as a firm expands production, its per-unit costs
decline
External economies: as an industry expands production, the per-unit
costs of production decline for every firm
Possibility of a falling supply curve for the industry
As an industry expands, per-unit costs may fall as a result of external
economies. Therefore, prices may fall.
 
13
 
Wages
 
Wages are equal to the marginal product of labor
von Thunen and John Bates Clark, an American economist trained in
Germany, had said the same thing earlier
But Marshall went farther
 
Alfred Marshall
 
14
 
Wages
 
Marshall pointed out that the demand for a resource, such as
labor, was a 
derived demand
, because it depended on the
demand for the finished goods made by the resource
 
Alfred Marshall
 
15
 
Marshall’s four laws of derived demand
 
1.
The greater the substitutability of other resources for labor, the greater
the elasticity of demand for labor
2.
The greater the price elasticity of product demand, the greater the
elasticity of demand for labor
3.
The larger the proportion of total production costs accounted for by
labor, the greater the elasticity of demand for labor
4.
The greater the elasticity of supply of other inputs, the greater the
elasticity of demand for labor
 
Alfred Marshall
 
16
 
Interest and Investment
 
In today’s macroeconomic theories, it is assumed that business
investment spending is inversely related to the interest rate
Marshall explained why this is so, relying on diminishing
returns to capital
Saving, on the other hand, rises with the interest rate
The interest rate reaches the level at which investment equals
saving
 
Alfred Marshall
 
17
 
Alfred Marshall
 
Assessment
 
Neo-classical synthesis.
The Adam Smith of his age.
 
18
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Explore Alfred Marshall's significant contributions to economic thought, including popularizing supply-demand analysis, consumer surplus, and producer surplus. Discover his graphical analyses of two-country trade and offer curves, shedding light on free trade outcomes and terms of trade. Dive into Marshall's pioneering work in shaping modern economic theory.


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  1. Alfred Marshall (1842-1924) ECO54 History of Economic Thought Udayan Roy

  2. Alfred Marshall (1842-1924) Principles of Economics, 1890 Free PDF download 2 Alfred Marshall

  3. Sources: Alfred Marshall The Ordinary Business of Life by Roger Backhouse, pages 177- 182 The Worldly Philosophers by Robert L. Heilbroner, Chapter VII (The Victorian World and the Underworld of Economics), pages 205-212 New Ideas from Dead Economists by Todd Buchholz, Chapter VII (Alfred Marshall and the Marginalist Mind) 3 Alfred Marshall

  4. Popularization of Supply-Demand Analysis Marshallian Cross; Marshall popularized the use of the familiar supply-demand diagram Popularization of consumer surplus and producer surplus 4 Alfred Marshall

  5. Reciprocal Demand Graphical analysis of two-country trade 5 Alfred Marshall

  6. Offer Curve: Country A Quantity Imported of Good Y No-trade terms of trade Quantity Imported of Good X Quantity Exported of Good X No trade Quantity Exported of Good Y 6 Alfred Marshall

  7. Offer Curve: Country B Quantity Imported of Good Y Quantity Imported of Good X Quantity Exported of Good X Quantity Exported of Good Y 7 Alfred Marshall

  8. Offer Curve: Country B Quantity Imported of Good Y Quantity Exported of Good X Quantity Imported of Good X Quantity Exported of Good Y 8 Alfred Marshall

  9. Offer Curve: Country B Quantity Exported of Good Y Quantity Exported of Good X Quantity Imported of Good X Quantity Imported of Good Y 9 Alfred Marshall

  10. Free Trade: two-country outcome Good Y: imports of A and exports of B Free Trade terms of trade Offer Curve of Country B. Offer Curve of Country A. Good X: imports of A and exports of B Good X: exports of A and imports of B Good Y: exports of A and imports of B 10 Alfred Marshall

  11. Elasticity of Demand Elasticity of Demand formula, 1882 Marshall also discussed the determinants of the elasticity of demand High price (relative to buyers incomes) Availability of substitutes 11 Alfred Marshall

  12. Elasticity of Supply Supply elasticity depends on time available to producers to respond to a price change Market period: perfectly inelastic supply, price is determined entirely by demand in the case of perishable goods and by expected future prices in the case of durable goods. Short run: rising supply curve, price is determined by both supply and demand, usage levels of some resources are fixed Long run: usage levels of all resources are variable, supply could be a falling curve Very long period: changes in knowledge, population and capital cause long run prices to change gradually 12 Alfred Marshall

  13. Economies of Scale Internal and external economies of scale Internal economies: as a firm expands production, its per-unit costs decline External economies: as an industry expands production, the per-unit costs of production decline for every firm Possibility of a falling supply curve for the industry As an industry expands, per-unit costs may fall as a result of external economies. Therefore, prices may fall. 13 Alfred Marshall

  14. Wages Wages are equal to the marginal product of labor von Thunen and John Bates Clark, an American economist trained in Germany, had said the same thing earlier But Marshall went farther 14 Alfred Marshall

  15. Wages Marshall pointed out that the demand for a resource, such as labor, was a derived demand, because it depended on the demand for the finished goods made by the resource 15 Alfred Marshall

  16. Marshalls four laws of derived demand 1. The greater the substitutability of other resources for labor, the greater the elasticity of demand for labor 2. The greater the price elasticity of product demand, the greater the elasticity of demand for labor 3. The larger the proportion of total production costs accounted for by labor, the greater the elasticity of demand for labor 4. The greater the elasticity of supply of other inputs, the greater the elasticity of demand for labor 16 Alfred Marshall

  17. Interest and Investment In today s macroeconomic theories, it is assumed that business investment spending is inversely related to the interest rate Marshall explained why this is so, relying on diminishing returns to capital Saving, on the other hand, rises with the interest rate The interest rate reaches the level at which investment equals saving 17 Alfred Marshall

  18. Assessment Neo-classical synthesis. The Adam Smith of his age. 18 Alfred Marshall

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