Week 2: Marginalist school (1871): Leon Walras (Was there a marginalist…
Week 2: Marginalist school (1871): Leon Walras
Walras- Mathematical general equilibrium model -1
Analysis of exchange:
Determination of relative prices:
1 numeraire, and m-1 relative prices
Optimization of utility:
marginal U divided by price must be the same for all goods.
--> Hence, prices are determined first. Given the prices, consumers optimize their consumption as to maximize utility.
Consumer’s demand is equal to firm’s supply for all goods
Firm’s demand is equal to the consumer’s supply for all factors of production
Consumers maximize utility, producers maximize profits
Walras- Mathematical general equilibrium model -2
Model extended to economy with production:
Conditions for cost minimization
Free competition brings production costs to minimum
Money is neutral
Doubling of money leads to doubling of prices
( Inheritance Hume and Adam)
--> Model was major step forward, but only few contemporary colleagues were able to understand it in detail
Was there a marginalist revolution?
Process rather than historical incident
Many ideas were formulated already decades earlier
Radically new approach to economic theory:
due to focus on demand conditions, introduction of marginal utility theory, increased use of mathematical methods
Breakthrough for the marginalize approach
Many lasting contributions, still to be found in modern economics:
Monopoly model, duopoly model, theory of diminishing marginal utility, theory of rational consumer choice, law of demand, law of diminishing returns, returns to scale concept, etc.
Several important later economists build their ideas on the microeconomic theories of the marginalists.