Alfred Marshall

This is a summary of the life of Alfred Marshall. It is also about the contributions he made to the economy, economic system and to the government.

1. Alfred Marshall July 26, 1842 – July 13, 1924

2. Alfred Marshall Born in London The second son of William Marshall , a clerk at the Bank of England, and Rebecca Marshall , née Oliver. Published “Economics of Industry” with his wife Mary Paley 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

3. Alfred Marshall Principles of Economics In defining Economics, Marshall stated: “Political economy or economics is the study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and use of the material requisites of well-being.” To Marshall, economics was a science of human behavior. The aim of the  Principles  is to study the economic aspects of human behavior in order to derive the laws governing the functioning of the economic system.

4. Alfred Marshall Theory of Demand Utility and Demand 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.

5. Alfred Marshall Theory of Demand Demand Schedules and Curves 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

6. Alfred Marshall Theory of Demand Alfred Marshall’s 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 : ( on the next slide ) Price Elasticity of Demand

7. Alfred Marshall Theory of Demand Price Elasticity of Demand Elasticity of Demand e D = percent change in quantity demanded = -  q /  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 ..

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

9. Alfred Marshall Theory of Production Marshall conceived of four different periods of production. 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).

10. Alfred Marshall Theory of Production 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) Secular period - (Very long run) Permits technology and population to vary

11. Alfred Marshall Costs of Production and Supply Laws of Return in the Long Run 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)

12. Alfred Marshall Marshall on Supply Consumers’ Surplus the difference between the total expenditures consumers would be willing to pay and what they actually pay. MU Quantity Demand Consumer Surpluss

13. Alfred Marshall 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).

14. Alfred Marshall Marshall on Supply LR forces that determine the shape and position of firm’s 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. 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.

15. Alfred Marshall 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.

16. Economics is not a body of concrete truths, but an “engine for the discover of concrete truth.”

17. http://policonomics.com/lp-neoclassical-economics-alfred-marshall/ http://www.encyclopedia.com/people/social-sciences-and-law/economics-biographies/alfred-marshall https://en.wikipedia.org/wiki/Alfred_Marshall References