Chp 11 : Marginalist School- Forerunners (Main Principles (Rational…
Chp 11 : Marginalist School- Forerunners
Johann Heinrich Von Thunen
a founder of
His major work –
The Isolated State
, Volume 1 was published 1826.
In volume 2, he expanded his
analysis and in the process established a crude marginal productivity theory of wages and capita
As the intensification of
production in agriculture rises
marginal costs to rise
This leads to
higher market prices
, which in turn makes it
profitable to cultivate new areas
farther from the market
series of concentric rings
devoted to a particular types of agricultural use
, develops around the central city.
The farther the ring from the city the less intensive is the
production, less perishable and the greater
the ability of the
goods to bear transportation costs
Thünen pioneered the
of the allocation of
resources to production
His thinking about
location of various types of agriculture
led him to
develop marginal productivity
theory of employment.
extended Ricardo’s law
diminishing marginal returns in analyzing rent.
Thunen suggested that
more unit of labor should be added
until Marginal Revenue Product of Labor
Rational economic behavior
– assumed people act rationally in balancing pleasures & pains, in measuring marginal utilities of different goods and in balancing present and future needs.
– considered individual decision making, market condition for a single type of good, the output of specific firms, etc
Focus on the margin
– focused on the point of change where decisions are made.
The use of abstract, deductive method
– focused on analytical, abstract approach in studying economic behavior
The pure competition emphasis
– No one person or firm has enough economic power to influence market prices
Demand-oriented price theory
– DD is the main factor in price determination rather than supply which is the emphasized of the classical school.
Emphasis on subjective utility
– DD depends on marginal utility, which is subjective, phychological phenomenon
– believed that economic forces generally tend toward equilibrium – a balancing of opposing forces.
Merger of land with capital goods
– lumped land and capital resources together in their analysis and in spoke of interest, rent, and profits as being the return to property resources
Minimal government involvement.
Antoine Augustin Cournot
He introduced the
curve over 30 years before the "marginalist revolution" of the early 1870s,he was able to
formulate a number of ideas about exchange, markets and competition
with a precision very close to that studied by students of intermediary microeconomics today.
Cournot was very conscious of being an innovator in the application of mathematics the the subject of political economy
Cournot pioneered the modern price theory for industries consisting of
profit maximizing firms
First economist to
develop concise mathematical models of pure monopoly, duopoly, and pure competition
Focused on the
rate of change of total cost
(now referred as marginal cost and revenue).
Developed the famous theories
of pure monopoly and duopoly.
Theory of Monopoly
Taking the market demand of a product to be a given mathematical function of the product’s price, Cournot derived the rule that a
profit-maximizing monopolist would follow in deciding what price to charge.
monopoly pricing rule
is the familiar
MR = MC
Cournot’s theory of duopoly,
a market in which two forms compete
was the first formal attempt by an economist to
analyze the conduct and performance of sellers in an oligopolistic
Two firms sell the same product. If they together produce a high output, the price of the product will be low; if they together produce a low output, the price will be high.
Each firm independently decides what amount to produce.
Cournot showed that the
output will be higher
price will be lower in duopoly
than in monopoly.
total profit of the two firms in a duopoly will be lower
than profit of the one firm in a monopoly
A French engineer
Earned a degree in engineering but have interest in theoretical and applied economics
Developed economic concepts
diminishing marginal utility, consumer surplus and price discrimination
Marginal Utility and Demand
Establish concept of
demand curve; an inverse, negative relation between price and quantity
demand curve is the marginal utility curve
additional unit good yield increasingly less extra satisfaction
Value placed on good varies from individuals to individuals, the amount of satisfaction varies on how it is being used
consumer will not buy additional good unless price fall
Defined as the
difference between each unit’s marginal utility and its price
On a per unit basic, the difference between each unit’s marginal utility and its price.
The sum of all such differences between marginal utility and price is total consumers’ surplus.
Monopoly Price Discrimination
If the goal is to
maximize the total utility, the price of a good should be set at zero
At a price above zero:
otal utility is remain the same
, but some of the utility is transferred from
consumers to producer
Some utility is lost
(that is, deadweight loss).
However, he recognized that
zero price will not encourage a higher production
no profit and cannot cover the total costs
So he suggested that price should be set at which
total revenue equals to total cost
, that is, a point where
total loss is minimized
Alternatively, he suggested a
dual- and multiple-price scheme
reduce the loss of total utility.
Price discrimination can occur only where
it is possible to segregate buyers into identifiable groups
and where resale of the
product by customers is impossible or prohibitively expensive.