ALFRED MARSHALL &

NEOCASSICAL ECONOMICS

ALFRED MARSHALL (1842-1924)

Father of NeoClassical microeconomic theory (the other is Leon Walrass).* His work was based on Smith, Ricardo and J.S Mill economic theory. His undergraduate study at Cambridge revealed a strong preference and aptitude for mathematics teaching mathematics. As such Marshall came to economics with a strong background in mathematics and a deep humanitarian desire to help lower income group.

Marshall popularized the modern diagrammatic approach to economics. Developed basic technique for illustrating SSDD analysis with graphs. Only published 1890.
He was the great synthesizer, seeking to combine the best of classical economics with marginalist thinking, hence producing neoclassical economics. Many of his footnotes and appendixes offer hints of ideas of which he was aware, but which others later worked out in greater detail.

Marshall reasoned for regarding the study of economy as a complex and difficult.
(i)everything seems to depend upon everything else, there is complex and often subtle relationship among all the parts of the system. (ii) time is chief cause of those difficulties in economic investigations which make necessary for man with his limited power to go step by step.

 It is difficult to isolate a single cause & be certain of its effects.

Marshall developed his basic thought system because economists cannot hold constant all the variable that might influence the outcome of a given cause, they must do so on the theoretical level by assumptions. Hypothesize that changes in certain elements occur ceteris paribus, with other things being equal. The ceteris paribus technique permits the handling of complex problems.

Marshalls 1st and most important ceteris paribus technique was to develop a partial equilibrium analysis.

 To break down a complex prob, isolate a part of economy for analysis, ignoring but not denying the interdependence of all parts of the economy. Causes take time to work out their effects (difficulty in economic analysis).
Marshalls use of ceteris paribus corresponds to his method of dealing with time. Immediate period or the very short run, many factors are held constant. More & more constant are permitted to vary as the t period is extended to the sr, the lr and the secular period (very lr).

 The source of Marshall greatest contribution was his analysis of the influence of time on SS. Defined 4 time periods his distinctions were purely artificial (no such lines in the economic conditions of actual life).

The various time periods are defined in terms of the economics of the firms and of SS.
The market period so short, SS fixed, perfectly inelastic, firms unable to respond to P changes.

The short run period firm can change prod & SS but cannot change plant size. SS curve slopes upward.
The long run plant size can vary & all costs are variables. SS curve more elastic than sr. The secular period a very lr, permits technology & pop to vary.

 Fruitless to argue whether DD or SS determines P.

Causation is not a simple matter & any attempt to find one single cause is doomed (fated/destined) to failure.

Marginal analysis had been misused by many economists.

It is not correct, to say MU or MC determines P.

Marginal analysis simply suggest that we must go to the margin to study the action of those forces which govern the value of the whole.
MU or MC does not determine P, for their value along with P are mutually determined by factors acting on the margin.

 Jevons - isolated the essential elements in P determination: U, cost & P. Trying to find a single cause.
Viewing the process as a chain of causation: with cost of prod determining SS, SS determining U & MU determining P. Marshall this is a mistake- it ignores the interrelationships and mutual causation among theses elements. DD, SS & P interact with one another at the margin and mutually determine their respective value.

 His most important contribution to demand theory as the concept of price elasticity of demand. It was Marshall, with his mathematical ability, who was able to express it precisely. Individuals desire commodities because of the U received through their C. Derived total U by adding the Us received from consuming each good (additive). The U from good A depends solely on the qtty of good A. Substitution and complementary relationship are ignored.

 The most important task of the theory of DD is to explain the shape of DD curve.
Assumed U was measurable through the P system. If a commoditys MU decreases as more is consumed, does it follow that individuals will pay lower Ps for larger qttys. DMU takes place. In equilibrium , the consumer spend in such a way that the last dollar spend for any final good will have the same MU as that spent for any other good.

MU N MU A MU A ... MU M PAA P P B N

 Marshall had little to say about business cycles, partly because of his microeconomic approach.
He and other who developed theories of the behavior of individuals and the conduct of small representative firms found it easy to ignore fluctuations.