Week 3: Neoclassical school
Neo-classicals vs marginalists: both marginalizes that consider decision making and price formation at the margin, but...
- neo-classicals attach more value to role of money
--> John Gustav Knut Wicksell (1851-1926) and Irving Fisher (1867-1947)
- Neo-classicals extended marginal analysis to different
market structures
--> Edward Chamberlin (1899-1967) and Joan Robinson (1903-1983
- neo-classicals consider both demand and supply in price determination
--> Alfred Marshall (1842-1924)
Alfred Marshall (1842-1924): Biography
Attended University of Cambridge
Professor University of Cambridge (1868)
Inspired by Ricardo and Mill
Balliol croft / Marshall house (CHECK SLIDE 4/18)
Works:
The Economics of Industry (1879)
Principles of Economics (1890)
Marshall: Supply and Demand
Relative importance of supply vs demand depends on time perspective
Partial equilibrium:
Ceteris Paribus concept
Price theory integrated classical and marginalists’ elements. (Inheritance scholastics)
Marginalists: downward sloping demand function
Intersection demand and supply: Marshallian cross
Classicals: prices determined by production costs
Present vs short term vs long term --> capacity for adjustment
The shorter the period of time, the larger is the role of demand
“Whether Classicals or Marginalists were right depends on time perspective chosen”
Marshall: Utility and welfare
Consumer demand is based on marginal utility concept Rational consumer choice
Social surplus = consumer surplus + producer surplus
Marshall: Further contributions
Originator of concept of external effects / externalities
Income distribution also depends on supply and demand * Prices of production factors (wage, interest, rent)
Marshall introduced price elasticity of demand
Externalities explain why LR supply curve is downward sloping under perfect competition
Tax industries with negative externalities, and subsidize those with positive externalities.