“Alfred Marshall.” Please respond to the following:
- Examine three (3) of Alfred Marshall’s contributions to economic theory and determine how they still impact contemporary economics.
- Marshall surmised, “A small quantity of a commodity may be insufficient to meet a certain special want; and then there will be a more than proportionate increase of pleasure when the consumer gets enough of it to enable him to attain the desired end.” Discuss how you feel this statement relates to Marshall’s ideas on marginal utility.
- Consider Marshall’s four (4) laws of derived demand. Identify how these laws are still applicable to modern economic theory.
Alfred Marshall’s main argument is that the economy is an evolutionary process in which technology, market institutions and people’s preferences evolve along with people’s behavior. He introduced the idea of 3 periods namely, Market Period, Short Period and Long Period, to understand how markets adjust to changes in supply or demand over time. Market Period is the amount of time for which the stock or commodity is fixed. Meanwhile, the time in which the supply can be increased by adding labor and other inputs but not adding capital is known as Short Period. Lastly, Long Period means the amount of time taken for capital to be increased. Marshall’s basic approach to welfare economic still stands today. In his most important book, “Principles of Economics”, he was able to quantify the buyers’ sensitivity to price. He emphasized that the supply and demand determines the price output of a good: the two curves are like scissor blades that intersect at equilibrium. This concept is otherwise known as Price Elasticity of Demand. He proposed that the price is basically parallel for each unit of commodity that a consumer buys, but the value to the consumer of each additional unit declines. In line with this he illustrated the benefits of the consumer from market surplus. He termed these benefits as Consumer Surplus which is equated as the size of the benefit equals the difference between the consumer’s value of all the units and the amount paid for the units. In other words, the consumers pay less than the value of the good to themselves. Lastly, he also introduced the concept of Producer Surplus which is the amount the producer is actually paid minus the amount that he would willingly accept.
According to Marshall, labor demand is a derived demand, dependent upon the performance of goods and services markets. Implications of his four laws are relevant to the understanding of union power and union behavior.Since labor and capital are both production factors, paid according to their respective contribution to production. Any short run disequilibrium would be corrected in the long run. Labor and capital mobility would act and market forces would bring prices and quantities of labor to the long run equilibrium.
Marshall also proposed his three periods of business progression. First, when capital is all fixed (ceteris paribus). Second, although capital may be fixed, supplies could be adjusted to add additional labor. Third, the time when all costs and labor become variables. Therefore, business should only increase the quantity of supplies and labor to the point where the price would equal the marginal cost. hence achieving maximum efficiency. With international trade becoming more and more complex during Marshall’s time, his business ideas were, and still are relevant. In a past economic course that I have taken titled “Comparative Economic Systems”, Marshall’s ideas are everywhere to be found in the 20th century.
Marshall introduced the concept of welfare in the study of economics. According to Marshall; economics is a study of mankind in the ordinary business of life. It examines that part ofindividual and social actions which is closely connected with the material requisites of well being. In thisdefinition, Marshall has shifted the emphasis from wealth to man. He gives primary importance to man and secondary importance to wealth.
Marshall’s exposure to philosophy led to a lifelong concern with poverty and other social problems that plagued industrial England and, in turn, to the study of economics, in which he excelled. John Maynard Keynes, described Marshall as the greatest economist of the nineteenth century. Despite the changes in theory since his death, large parts of economics remain distinctly Marshallian. His major contributions include the concepts of competitive equilibria, price elasticity of demand, internal and external economies of scale, increasing and decreasing cost industries, quasi-rent, and consumer surplus. Alfred Marshall was the first to expand the standard supply and demand graph demonstrating number of fundamentals regardinf supply including the supply and demand curves, market equilibrium, the relationship among quanity and price in regards to suppy, demand, law of marginal utlity diminishing to produce certain results. Alfred Marshall made major contributions to economics in the theories of supply and demand, marginal utility and cost of production. His ideas of diminishing marginal utility was a major contribution to economics. For Example, when we as consumers eat something, are initial consumption pleasure is high. As the consumer continues to eat his consumption pleasure decreases and eventually he no longer has a desire to consume. As consumers we experience this marginal utility in almost everything we consume today. Marshall presented a detailed analysis of marginal utility and he presented the market supply and demand as we use it today. However, it was his development of the tool of consumer surplus that was genuinely a great accomplishment. Another contribution that Marshall made was differentiating concepts of internal and external economic scale. That is that when costs of input factors of production go down, it’s a positive externality for all the firms in the market place, outside the control of any of the firm. Marshall emphasized that the price and output of a good are determined by both supply and demand: the two curves are like scissor blades that intersect at equilibrium. Modern economists trying to understand why the price of a good changes still start by looking for factors that may have shifted demand or supply, an approach they owe to Marshall.
Marshall made at least four contributions to the classical quantity theory. He endowed it with his Cambridge cash-balance money-supply-and-demand framework to explain how the nominal money supply relative to real money demand determines the price level. He combined it with the assumption of purchasing power parity to explain (i) the international distribution of world money under metallic standards and fixed exchange rates, and (ii) exchange rate determination under floating rates and inconvertible paper currencies. He paired it with the idea of money wage and/or interest rate stickiness in the face of price level changes to explain how money-stock fluctuations produce corresponding business-cycle oscillations in output and employment. He applied it to alternative policy regimes and monetary standards to determine their respective capabilities of delivering price-level and macroeconomic stability. In his hands the theory proved to be a powerful and flexible analytical tool. Marshall’s laws of derived demand are still applicable to modern economic theory because labor and production are still very important to our economy. The laws of derived demand can be seen today in industries like contract work.
The theory of quasi-rent is very interesting. Marshall’s belief was that the amount of land could not be controlled, as it was set by nature. As the amount of land could not be increased, so the value (supply/demand) of the land could be controlled by how the land was being used. I believe this still holds true. I would say that is why land at the beach or at the lake is more expensive than other plots of land.
Examine three (3) of Alfred Marshall’s contributions to economic theory and determine how they still impact contemporary economics Answer