ALFRED MARSHALL Marshalls Contributions to Economics Marshall presented

ALFRED MARSHALL Marshall’s Contributions to Economics : • Marshall presented his work in the book Principles of Economics spread into six volumes • His contributions are accounted in the following form: Nature , Scope and Method of Economics : • Credit goes to Marshall for disintegrating Economics from Political economy • He treated Economics as an independent science • He regarded Economics as a science analyzing wealth earning and wealth spending activities of human beings

Contd. • Economics is a study of wealth, but more importantly , it is a study of man • According to Marshall, “The function of the science is to collect, arrange, and analyze economic facts and to apply knowledge gained by observation and experience, in determining what are likely to be immediate and ultimate effects of various groups of causes; and it is held that the laws of economics are statements of tendencies expressed in the indicative mood and not ethical percepts in the imperative. Economic laws and reasoning in fact are merely a part of the material which conscience and common sense have to turn to account in solving practical problems and laying down rules which may be a guide in life”

Contd. • The method of analysis that Marshall followed is called the partial equilibrium analysis • The analysis is based on a method where other things are assumed to remain constant • This takes into account one thing at a time by considering other things remaining the same Cardinal Utility : • Marshall assumed that marginal utility is measurable in principle • Utility can be measured in terms of money • He also assumed the constancy of marginal utility of money

Contd. • He observed that marginal utility of a commodity is independent of the quantity of other commodities possessed Demand, Supply and Price : • Marshall introduced his theory of demand supply as determinants of value • Behind demand is marginal utility and behind supply is the marginal cost of production • Marshall utilizes the utilitarian approach of the Austrian school of thought and the cost of production approach of the classical school

Contd. • Marshall argued that just as two blades of a pair of scissors are equally important for cutting a piece of paper, similarly both utility and cost (demand supply) are equally important in the determination of value • Marshall also introduced the general law of demand • Marshall’s analysis of price is based on time element • He distinguished between the market value and the normal value • Whereas the market value is a short term phenomenon and the normal value is a long term phenomenon

Agents of Production • According to Marshall , the agents of production are land, labor, capital and organization • The supply of land is fixed. It has no cost of production • Marshall observes that land is subject to the law of diminishing returns • Labor is defined as the economic work of man (manual and intellectual) • Capital is stored up provision for the production of goods and services • Capital is a derived agent. It is the combination of man’s work and nature’s assitance

Law of Diminishing Utility • According to Marshall the law of diminishing utility is the additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has • The demand price of a commodity is based on its marginal utility Elasticity of Demand : • Marshall precisely defined the elasticity of demand (Ed) Ed= △Q/△P • The elasticity of demand for a commodity in a market is great or small according to the amount demanded increases much or little for a given fall in price and diminishes much or little for a given rise in price

Consumer’s Surplus • Marshall introduced the concept of consumer’s surplus in relation with price – utility link • It is the difference between the total utility and the marginal utility

Contd. • Consumer’s surplus =total utility (OMPD)-marginal utility (OMPK) • Therefore , it is equal to area DPK in the above diagram • This concept has extensively been used by welfare economists • Marshall also used the concept of producer’s surplus • This is measured by the difference between the market price and supply price of labor and capital • The concept of consumer’s surplus has been borrowed by Marshall from Dupuit

Internal and External Economies • The benefits of large scale production is called economies of scale • Internal Economies-occurs because of internal factors such as: • Specialization, efficient management , professionalism , etc. • External Economies-comes up because of external factors such as: • Common transportation, common infrastructure , information , etc. Representative Firm: • Marshall introduced the concept of representative firm

Contd. • A representative firm is one which has a fairly long life and fair success, which is managed with normal ability and which has normal access to economies of scale • Marshall introduced this concept to find a solution for the difficulties in determining the long run normal value of a commodity • This concept was developed by Marshall for analyzing the supply price of a commodity Quasi Rent: • Quasi rent is a kind of surplus income earned by the factors of production other than land in the short period • It is the income derived from machines and other appliances for production made by man • It is net return to an asset of limited life

Contd. • If the demand for machines goes up in the short run, they will earn an extra income similar to rent • However, in the long run, their supply can be increased and quasi rent will vanish away Distribution of Income: • According to Marshall , distribution of income is an integral part of the process of valuation • Each of the agents of production has both demand supply • Marshall uses the demand supply approach for determining the values of factors of production • Like Ricardo, he emphasized the surplus aspect of rent

Contd. • However, he has distinguished between pure rent and quasi rent • The pure rent arises on land which has no supply price • The rate of interest is determined by the demand for and supply of capital at least in the temporary period • Wage is determined by the joint influence of demand for and supply of labor • The supply price of labor is determined by the cost of rearing and training • Profits are earnings of management and returns on capital • Price fluctuates with change in price • Marshall’s distribution theory is an extension of his general theory of value