MICRO ECONOMICS THEORY & ANALYSIS II

PROJECT
Topic:

ALFRED MARSHALL

Submitted To:

Ms. ZUNAIRA AHMAD

Submitted By:

SEEMAL JAMIL

MPhil Economics
1st Semester
National College of Business Administration
Alfred Marshall

Biography
• He was born in Bermondsey, London,
England on July 26, 1842 and died on
July 13, 1924.
• He was the second son of Rebecca
Marshall and William Marshall who
was a cashier at the Bank of England.
• He was married to Mary Paley.
• In 1885, he became professor of political economy at Cambridge
• He got retired in 1908.

Education
• He educated at the Merchant Taylors’ School, Northwood and St
John’s College, Cambridge.
• He refused Oxford scholarship (ministry) and went to Cambridge
to study Mathematics.

• Marshall experienced a mental crisis so that he gave up physics

and switch to philosophy.
• Began with metaphysics and led him to ethics, ultimately led him
to Economics.
 • Since he decided to marry he had to leave Cambridge in 1877.
• In 1884 he returned back to Cambridge.

Marshall’s contributions to the field of Economics

 He was concerned for the poor and was desired to improve the
well-being of society through Economics (focused on applied
theory).
 He produced many great scholars like J.M. Keynes and Joan
Robinson. His first book also was the textbook for many years and
he started the textbook legacy.
 He started the branching of economics and he dealt mainly with
Microeconomics and at the end of his life he began to deal in what
today we call Macroeconomics.
 Refused to take rigid positions on theoretical and methodological
issues.
 He was known as the father of modern orthodox microeconomic
theory (neoclassicism) along with Walras.
 Structural basis of undergraduate economic theory.
 Translated Ricardo and J.S. Mill Economics into
Mathematics.

 Defined Micro 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.”
 He equated political economy with economics.
 It is the “Study of mankind in the ordinary
business of life”
  Includes analysis of individual and social (in part
government) action
 Principles of Economics

 One of the greatest economic works.

 His specialty was microeconomics i.e the study of
individual markets and industries.
 Emphasized that the price and output of a good are
determined by both supply and demand.
 Modern economists also use Marshall’s approach to
figure out economic problems.
 Published findings in Principles of Economics (1890)
after 20 years of work, with mathematics and graphs in
footnotes and appendices so as to be understandable to
businessmen and society as a whole.
 Publications
 In 50 years of writing 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
 Theory of Equilibrium
 Temporary equilibrium
 The simplest equilibrium between desire and effort
 In a barter system, a true equilibrium may not exist.
But this temporary equilibrium will be found in
markets.
 Stable equilibrium is achieved when any displacement from
equilibrium will produce forces returning the market to
equilibrium.
  Unstable equilibrium is possible when supply curve is
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.
“When therefore the amount produced (in a unit of time) is such that the
demand price is greater than the supply price, then sellers receive more
than is sufficient to make it worth their while to bring goods to market to
that amount … On the other hand, when the amount produced is such
that the demand price is less than the supply price, sellers receive less
than is sufficient to make it worth their while to bring goods to market
on that scale … When the demand price is equal to the supply price, the
amount produced has no tendency either to be increased or to be
diminished; it is in equilibrium”.
—Book V, Chapter III,
Section 6

 Wants, utility, and elasticity of demand

1. Human wants
 Human not only chase the large quantities, but also
good qualities of things.
 Human desires also affected by the common senses and
social activities.
 As man becomes developed, their needs and wants will
also become subtle and various.
 Theory of consumption is not really the scientific basis
of economics…
2. Consumers’ demand
  Consumers’ demand governs trader’s demand.
 Utility relates to wants and desire.
 Marshall’s opinion:
A person’s demand for a thing should always “reference
to the prices at which he would buy that amount and other amounts”.
• The law of demand:
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
i.e. the amount demanded increases with a fall in price,
and diminishes with a rise in price.
 Degree of relationship is shown by the coefficient of
price elasticity:
3. Elasticity of Demand
eD = percent change in quantity demanded = - q / p
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.
  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 1st to express the concept of elasticity
with mathematical precision and is considered its
discoverer.
 If the consumer pays a single price for all units bought
then the total willingness to pay for those units will
exceed the amount actually paid. This is consumer’s
surplus.
 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).
 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.
 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.

 Theory of Production
 Marshall defined four different periods of production.

 Market period – supply inelastic

 Short run – upward sloping supply curve – can change
level of output but not plant capacity; prime costs and
supplementary costs
 Long run – can vary output and plant capacity
 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 – technology and

population can change

 Costs of Production
 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)
 Factors of Production
 On land
 On labor
 On capital
 On industrial organization

 Distribution of the national labor

 Labor income
 Profits of capital
 Rent on land

 Marshall’s contribution to Macroeconomics

 Economic Fluctuations, Money and Prices.
 Marshall studied influence of monetary forces on
general level of prices.
• Money, Credit and Commerce (1923)
 Suggested 2 public policies to combat depression and
unemployment.
 Control markets so that credit is not over-expanded in
periods of rising business confidence b/c over-
expansion may lead to recession.
 If depression occurs, governments can help restore
business confidence by guaranteeing firms against risk.

 Marshall’s Quasi-rent
  Reward paid to a factor which exceeds its
opportunity cost
 The rent is a necessary incentive for something
 Are payments to factors of production (e.g., wages,
profits) price determined or price determining?
 Classicals believed them to be price determining –
that is, the price of the final product depended upon
the price of the factors of production (inputs) used to
produce the final product (supply oriented).  An
exception was rent, which was price determined
since it was fixed in supply.
 Marginalists said that payment to factors of
production was price determined – that is, the price
of the final product determined the factor payments
(demand oriented).
 Marshall said “it depends.” 
 What do quasi-rents compensate for?
 Innovation.
 A lot of innovations are hard to patent, but an
industry leader like Microsoft can be
reimbursed for its R&D by winning a leading
position in the market.

 New institutional Economics

 Modified Neoclassical framework in considering
both efficiency and distribution issues.
 Contrast to traditional institutional Economics,
which is critical of mainstream neoclassical
economics.

 Aspects in current NIE analyses

 organizational arrangements
 property rights
  transaction costs
 credible commitments
 modes of governance
 ideological values

 Methodology

 Used Mathematics as a shorthand language, rather than an

engine of inquiry.
 Used to illustrate by examples that were important in real
life.

 Marshall on Method

…I know I had a growing feeling in the later years of my work at the

subject that a good mathematical theorem dealing with economic
hypotheses was very unlikely to be good economics: and I went more on
the rules.
Critics:
• German & English historically oriented economists found his
economics too abstract and rigid.
• Veblen and institutionalists attacked his method.
• Advocates of abstract mathematical methodology criticized
his historical method and resented his remarks about the
limitations of theory and mathematics
• Four criticisms were directly related to his original derivation
of the demand curve and his analysis of consumer's surplus.
 • : first, whether an additive utility function adequately
explains consumer behaviour; second, whether the marginal
utility of money can be treated as a constant; third, whether
the quantity demanded of one commodity can be treated as a
function of its price alone; and fourth, whether it is possible
make interpersonal comparisons
• Simon N. Patten (-1893a) severely criticized Marshall's
doctrine of consumer's surplus in the Annals of the American
Academy of Political and Social Science on the grounds that
the utility derived from one commodity cannot be estimated
in isolation from other commodities, because all commodities
contribute jointly to the well-being of the consumer.
• Shortly after the Principles appeared, Marshall's theory of
barter was politely criticized by Edgeworth (1891a) in the
Giornale.
• Patten (1893a, 1893b), Nicholson (1902 [1893], 1894), and
Fisher (1965 [1892]), among others, criticized Marshall for
making interpersonal comparisons of utility. They argued
that it was not possible to compare the satisfaction that two
different people derive from their expenditures. Marshall was
well aware of this criticism long before his Principles
appeared.

Reference
• http://en.wikipedia.org/wiki/Alfred_Marshall
• http://www.econlib.org/library/Enc/bios/Marshall.html
• http://www.encyclopedia.com/people/social-sciences-and- law/economics-
biographies/alfred-marshall
• http://policonomics.com/lp-neoclassical-economics-alfred-marshalls
• http://econfaculty.gmu.edu/bcaplan/quasi-rent
th
• Marshall, A. (1890). Principles of Economics: an Introductory Volume (9
Ed.). New York, NY: Macmillan.