Founder One

of neoclassical economics

of the great names in the development of

contemporary economic thought, and the book by which he is most widely knownPrinciples of Economics
Born His

26 July 1842 in Bermondsey, London,

England father, John Marshall, held the respectable middle-class position of cashier in the Bank of England
His

education was planned as basically a

preparation for ordination in the Anglican church. He was expected to go up to Oxford

Was

educated at the Merchant Taylors School, Northwood and

St. Johns College, Cambridge

By

the late 1860s he had developed such a consuming interest

in economics that he decided to become a scholar teacher rather

than a clergyman

And under the influence of the writings of two early

mathematical economists, Cournot and von Thiinen, he began

to translate Ricardo's and J. S. Mill's economics into

mathematics
Was

one of the best mathematics students of his generation in the rank of Second Wrangler in the 1865 Cambridge

England
Achieved

Mathematical Tripos

From

1877 to 1885, Marshall taught political economy,

of Political Economy at the University of

first in Bristol and then at Oxford.

Professor

Cambridge from 1885 to 1908

He

was the founder of the Cambridge School of

Economics
In

1877, Alfred married Mary Paley, who was a student

in his political economy class at Cambridge.

He

became a principal at University College, Bristol

There the Economies of Industry was brought to

completion and published by the house of Macmillan, which continued as Marshall's publisher thereafter
The

Economics of Industry marked Marshall as a

rising star in the economic firmament

With the death of W.S. Jevons in 1881, he moved

into the public eye as the leader in Britain of the new

scientific school of economies
His

frustrations were increased by the onset in

1879 of a debilitating illness, diagnosed as kidney

stones

Died 13 July 1924 in Cambridge, England

Partial Equilibrium Analysis

The central Marshallian method is usually termed partial analysis or partial equilibrium analysis and is often loosely referred to as the ceteris paribus approach. The Marshallian partial equilibrium approach is frequently contrasted with the method of general equilibrium associated with Leon Walras, and the contrast is usually considered unfavorable to Marshall. Partial analysis is a method by which an economy is partitioned so that the main effects of a parameter shift in a particular micromarket can be highlighted without considering the spillover into other markets; hence, this method also ignores the feed-back effects from the spillover. There are, of course, obvious dangers inherent in this method, but the answer lies, not in the general equilibrium approach, but in better specification of the partial model.

Principles of Economics (1890)

Marshall defined economics as: Political Economy or Economics is a study of mankind in the ordinary business of life. It examines that part of individual & social action which is most closely connected with the attainment & with the use of material requisites of well-being".

Theory of demand
Marshall developed utility theory for two reasons: first, to place restrictions on demand functions; and second, to create what he hoped would be powerful tools of welfare economics. The Marshallian demand curve relates the demand for a commodity per unit of time to its own price. The relationship is ceteris paribus; in particular, other prices and incomes are assumed constant. There are certain ambiguities in this statement of inclusions within ceteris paribus, but for the moment these are set aside. Marshalls generalized law of demand states that the price of a good and the quantity demanded are inversely related.

Marshallian Demand Curve

P
P1

P2 D

Q1

Q2

Qd

Price Elasticity of Demand

Marshall recognized that the slope of a demand curve was an inappropriate measure of the sensitivity of price to changes in quantity (as he put it, price being the dependent variable in Marshallian economics). A change in the units of measurement changes the slope of a demand curve, without changing the true relationship between price and quantity demanded. Marshall overcame this problem by deriving the concept of elasticity of demand. Since the demand curve is always negatively sloped, the elasticity measure is negative. However, by convention the negative sign is dropped. eD = - percent change in quantity demanded percent change in prices

Theory of Production
Marshall conceived of four different periods of production:

Market period - Very short period in which supply is fixed. 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). Long run - Plant size can vary and all costs become variable. Secular period - (Very long run) Permits technology and population to vary

Laws of Return in the Short Run

Law of diminishing returns. Marshall worked this out for agriculture, following the classical tradition. He understood that the addition of any variable factor to a fixed factor of production leads to diminishing marginal returns, however. Principle of substitution. A firm maximizes its profit by minimizing the cost of production of any given output. To minimize costs, the firm should substitute cheaper for more expensive inputs. The optimal input combination represents an application of Gossens second law to production theory. Factor demands are derived from the marginal revenue products of factors. The quantity of a factor demanded is determined by equating MRP to the factor price. Marshalls marginal productivity theory was mainly a theory of factor demand; it served as a theory of income distribution only in the short run.

Laws of Return in the Long Run

Marshalls theory of returns to scale was tied closely to the concepts of external and internal economies. External economies result from the general progress of the industrial environment and enable all firms in an expanding industry to experience decreasing costs. Better transportation and marketing systems and improvements in resource-producing industries might produce external economies. Internal economies are gained by a particular firm as it enlarges its size to achieve greater advantages of largescale production and organization. Increasing returns to scale that are internal in origin can lead to the monopolization of markets, as large firms develop lower cost structures than smaller firms, driving smaller competitors out of business. External economies are not, however, anticompetitive. Marshall believed that limits to internal economies existed, that managerial and organizational problems would eventually lead to internal diseconomies that would increase costs. Therefore, he believed that long-run increasing returns were likely to be caused by external economies.

Theory of Price Determination

Although Marshall was not the first to draw demand and supply curves and use them to determine equilibrium price and quantity, he nevertheless is regarded as the pioneer in their use. Marshall claimed to be developing the Ricardian tradition, and in a sense he was. Unlike Jevons, Marshall placed appropriate emphasis on cost of production as a determinant of supply and hence of price. However, he went far beyond Ricardo in his treatment of demand, basing it on utility as had Jevons. Ricardo understood that market prices are determined by demand and supply, but he failed to analyze demand in a thorough manner. Marshall argued that the role of demand in price determination was greater in the short run than in the long run. In the market period, demand determines price (and thus marginal utility determines price), because the quantity supplied is inelastic. In the short run, the supply curve is positively sloped, so marginal utility and marginal cost each have a role to play. In the long run, price equals marginal cost. If returns to scale are constant, marginal utility plays no role in price determination. Of course, it continues to play a role if returns are increasing or diminishing.

Theory of Distribution
This approach was built around a three-fold classification of the basic productive

factors - land, labour and capital - to each of which was assigned a unique distributive share. For Marshall arid his neo-classical contemporaries the analysis of distribution was essentially a problem in the pricing of productive services. Its solution was sought along lines analogous to those followed in explaining the pricing of products. In the case of both inputs and outputs, the interaction of supply and demand established equilibrium prices. This approach was built around a three-fold classification of the basic productive factors - land, labour and capital - to each of which was assigned a unique distributive share. (Some writers added a fourth productive factor; Marshall suggested that organizational skill might be so regarded). In this scheme of things wages were defined as the reward for human effort. This definition, unlike the classical one, did not restrict wage payments to a working class. Salary incomes and an imputed wage to management' in owner-operated establishments also fell within the neo-classicist's wage classification. Interest accrued to the owners of capital as a reward for waiting' i.e. for the sacrifice involved in foregoing present consumption in favor of prospective future gains. While rents were associated with the productive services supplied by land, the classical pre-occupation with agricultural land was shaded towards the background. In the neoclassical era the site values of urban land came into prominence.

The concept of quasi rent, which filled an important gap in classical analysis, is also important for Marshallian distribution theory. Rent theory explained the return to fixed land, but there was nothing in classical analysis to explain the return to capital equipment already in existence. Marshall used the term quasi rent to explain rewards to any factors in inelastic supply and specifically applied the analysis to capital equipment in the short run.

Marshallian Surplus
The

theory that economic welfare is divided into producer surplus and consumer surplus. He defined consumer surplus as "the excess of the price which [one] would be willing to pay rather than go without the thing, over that which [one] actually does pay" And producer surplus as the amount the producer is actually paid minus the amount that he would willingly accept.

Consumer Surplus

p Consumer Surplus

Demand

Qd

Significance
Supply

and Demand curve

It is frequently used today to determine the potential price and output of a good.
Marshallian

Surplus

He utilized this concept to analyze how taxes and price shifts affected market welfare and to estimate the constant change in individual demands in the market.
Price

Elasticity of Demand

It predicts what may happen to total revenue received when a company changes the price of product

CRITIQUE
Lionel Robbins led on frontal attack on the Marshallian view in the study of economics. The main points of criticism are:
Welfare

is not measurable. It varies from individual to individual, person to person and age to age. A thing may give pleasure to a person but it may be harmful for the others. There is not any instrument for its measurement. Robbins criticizes the idea of welfare. It is difficult to decide what welfare is and what not welfare is. There are many activities which do not promote the human welfare but they are regarded economic activities e.g. the manufacturing and sale of alcohol etc.

Marshall's definition has limited the scope of economics. As according to Marshall economics is concerned only with material welfare. According to him all those activities which do not promote the material welfare are totally ignored. As they are immaterial. Robbins does not think it right for the economists to confine their attention to the study of material welfare, because in the actual study of economic principles, both the material and immaterial are taken into account. Robbins rejected Marshall's definition as being classificatory because it makes a distinction between material welfare and non-material welfare and says that economics is concerned only with material welfare

References:

http://www.economyprofessor.com/theorists/alfredmarshall .php http://social.jrank.org/pages/2408/Alfred-Marshall.html http://conservapedia.com/Alfred_Marshall http://www.unc.edu/depts/econ/byrns_web/EC434/HET/P ioneers/marshall.htm http://www.economictheories.org/2008/08/alfred-marshallscope-of-economics.html http://www.economictheories.org/2008/08/alfred-marshallbiography-theory.html