ALFRED MARSHALL I. INTRODUCTION: Why pursue Alfred Marshall?

What are the reasons for Marshall becoming one of the prime characters in the field of economics? A. He was able to most clearly and comprehensively applied marginal analysis B. He established the marginal tradition that dominates microeconomic study today C. He taught some of the most prominent 20th century economists like J.M. Keynes and Joan Robinson II. Framework for Analysis: MARGINALISM (BUT he DID NOT invent or discover it!) A. Features of Marginalism: 1. Marginalism declares that the past is behind you. 2. You should go forward if the benefits outstrip the costs, even if they exceed by a lesser margin than before 3. You continue as long as the benefits of one step outweighs the costs, until the marginal benefits equals the marginal costs one shouldnt get carried away with forward movement but should be GRADUAL in deciding whether to go forward or not B. Marginalism insists on incremental gradual moves as the focus of inquiry EXAMPLE: How do firms decide how many cars to produce? III. Method / Approach to Analysis Natura non facit saltum. nature makes no sudden leaps A. took on a more evolutionary approach to the study of economics and believed that the would could improve gradually 1. Marginalism is evolution applied to economics B. believed that the businessman and the consumer make no great leaps, but step-by step they try to improve their situations 1. All sectors and individuals involved in economic activity adapt to changing prices C. closely inspects individual decisions along the way participants will reconsider their positions and decide to take new steps if the benefits exceed the costs D. his Principles of Economics differs from contemporary works: 1. Marshall was able to insert morality in his writings 2. Marshall often spoke directly to laymen used simple English in the main texts and kept the complex math in the appendices and footnotes E. his system for analysis and study: 1. Use mathematics as a shorthand language, rather than as an engine of inquiry 2. keep to them till you have done 3. translate into English 4. then illustrate by examples that are important in real life 5. burn the mathematics 6. if you cant succeed in 4, burn 3

IV. Contributions A. Economic time Short and Long Runs 1. economic time was not in sync with the world clock 2. ceteris paribus impounds all other factors as being equal the existence of other tendencies is not denied BUT their disturbing effect is neglected for a time a. other economists before Marshall have advised a ceteris paribus assumption BUT the Marshallian method is what todays textbooks utilize 3. proposes difference economic time frames: a. very SR only demand fluctuates b. SR producers can change the amount supplied can alter variable forms of capital and plant capacity is fixed c. LR producers can alter all factors of production AND entry and exit of firms can also occur 4. on the size of firms: *CLASSICAL: Growth tended to neither help nor hurt a firm **MARSHALLIAN: at some point, size led to inefficient operations a. internal economies arise from division of labor, buying supplies in bulk and using large machinery that smaller firms cannot afford b. external economies follow from events outside of the particular firm *** If Marshall was right, then big firms will always beat the small firms and competition will never happen Marshall was a strong proponent of competition, where was the compromise? 5. believed that firms could not live forever nature puts pressure on the private firms by limiting the length of the life of the original founders B. Combining Supply and Demand Analysis 1. endorsed the principle of diminishing marginal utility, and assumed that Price (or Marginal Cost) = Marginal Utility (or Marginal Benefit) a. also, in consuming two goods two goods, utility is maximized MUx = MUy 2. stated the Law of Demand the way we do so today a. identified the non-price determinants of demand that are placed in ceteris paribus 3. stated the Law of Supply the way we do so today a. also recognized that as suppliers produce more, costs tend to rise b. the producer should compare the MC of producing one more unit to the marginal benefit (the price) 4. developed partial-equilibrium analysis from this, the following principles were also demonstrated: a. equilibrium price and quantity in demand/supply analysis b. profit maximization at MR = MC c. the marginal return from capital equals the marginal returns from labor in production theory C. Elasticity while developing his demand/supply analysis, Marshall was able to refine one of the most important tools in all of economics D. Consumers Surplus the concept of a consumers surplus originated with Jules Dupuit BUT it was Marshall who named it so and developed the concept into how we study is today.