Alfred Marshall and

the Neoclassical Synthesis

• Alfred Marshall (1842-1924) was a prominent economist and one of the founders
of neoclassical economics. His work, along with that of Léon Walras, played a significant
role in consolidating and advancing neoclassical economic analysis.
• Marshall was born in Clapham, England, in 1842. His father wanted him to follow
in the family's clerical tradition, but Marshall had a strong interest in mathematics. He
enrolled at Cambridge University, where he excelled as a student. After exploring various
subjects, including metaphysics and ethics, he eventually settled on the study of political
economy.
• Marshall's dedication to economics was evident throughout his career. He
authored numerous publications, including books, articles, lectures, and testimonies
before royal commissions. His most famous work, "Principles of Economics" (1890),
went through multiple editions and remains influential to this day.
• Marshall's impact on economics extended beyond his written contributions. He
established a strong oral tradition at Cambridge University, where he taught and
mentored many students. His students, including notable economists like John Maynard
Keynes and A.C. Pigou, carried forward his teachings and expanded upon them.
• One aspect that distinguished Marshall from his contemporaries was his cautious
approach to mathematics in economics. While he recognized its usefulness as a shorthand
language for expressing economic ideas, he emphasized the importance of empirical
facts, historical knowledge, and clear communication. Marshall believed that over-
reliance on mathematical models could lead to unrealistic assumptions and distort the
understanding of real-world economic phenomena.
• Marshall's methodology focused on refining common sense through organized
analysis and reason. He viewed economics as an extension of classical economic thought,
building upon the work of Adam Smith, Ricardo, and Mill. Economic laws, according to
Marshall, are statements of tendencies and regularities observed in human behavior. By
studying these regularities, economists can develop general rules and theories to guide
practical decision-making.
• In his analysis, Marshall also recognized the role of time in economic processes.
He emphasized the importance of understanding how economic variables and
relationships change over time. Marshall's conception of time in economics, along with
his insights into markets and competitive equilibrium, contributed to his partial
equilibrium approach to economic theory.
• Alfred Marshall's contributions to neoclassical economics, both in terms of his
written works and his influence on students, played a crucial role in shaping the
discipline. His emphasis on empirical analysis, cautious use of mathematics, and focus on
real-world applicability continue to be influential in modern economic thinking
• The excerpt you provided discusses Alfred Marshall's analysis of the fishing
industry and the concept of long-run and short-run equilibrium. Marshall observed that
the average-cost functions in the fishing industry are U-shaped. As variable inputs like
fishermen, deckhands, or nets are added, the returns in terms of the number of fish caught
per unit of input increase, leading to a decline in average costs. However, beyond a
certain point, adding more variable inputs leads to a decline in average productivity,
causing average costs to rise.
• Marshall also emphasized the distinction between short-run and long-run effects
on market demand. In the short run, he focused on factors that would affect the market
for fish given an increase in demand. For example, he considered the inducements of
good fishing wages to sailors and the adaptability of old fishing boats to meet the
increased demand. Marshall believed that a short-run increase in demand would raise the
normal supply price, as more capital and labor would be attracted to the fishing industry.
• In terms of competitive equilibrium, Marshall described how supply decisions
follow demand changes in competitive markets. In the short run, the industry equilibrium
occurs at the intersection of the short-run supply function and the demand curve.
However, in the long run, adjustments take place as firms react to economic profits or
losses. Marshall discussed three possible cases: constant-cost industry (where
proportionate increases in inputs yield proportionate increases in output), increasing-cost
industry (where costs rise as industry output expands), and decreasing-cost industry
(where costs decline as output expands).
• Marshall introduced the concepts of internal and external economies. Internal
economies are associated with the organization and efficiency of individual firms, such as
the division of labor and improved machinery use. External economies, on the other
hand, depend on the general development of the industry. For example, larger-scale
operations in boat-building and net making could lead to lower factor prices and lower
unit costs for the fishing firms.
• Overall, Marshall's analysis provides insights into the relationship between
supply, demand, costs, and equilibrium in the fishing industry and sheds light on the
different factors influencing market outcomes in the short run and the long run
• The passage you provided discusses some analytical difficulties and limitations
associated with Marshall's method, particularly in the context of long-period supply and
external economies. It highlights the challenges in explaining the nature of external
economies and their impact on input prices. The passage also questions the ability of
partial equilibrium analysis to handle the complexities of long-run supply and
technological changes.
• The passage mentions that the long-run supply curve assumes constant
technology, but it becomes doubtful whether this assumption holds true in the presence of
external economies. It suggests that changes in technology would affect the curve and
that it would be difficult to find an external economy that doesn't alter technology in
some way, especially over longer periods.
• Another issue raised is the reversibility of the long-run supply curve. It argues that
economies and technological advances in an industry are not destroyed when demand
declines, which implies that the long-run industry supply curve is not reversible. This
poses challenges for using partial equilibrium analysis to explain prices and market
conditions accurately.
• The passage also briefly discusses the compatibility of decreasing-cost conditions
and competitive equilibrium. It states that perfect competition cannot coexist with
external economies and decreasing costs because firms would have the incentive to
purchase all other firms in order to internalize the economies, leading to a likely outcome
of monopoly or multiplant production. This recognition contributed to the development
of the theory of imperfect competition.
• The passage then shifts focus to Marshall's theory of demand and consumer
surplus. It mentions that Marshall provided extensive answers to questions about demand
functions and their construction. He emphasized the role of time in demand theory, the
subject's tastes and preferences, the subject's income or wealth, the purchasing power of
money, and the price and range of rival commodities as important considerations for
constructing demand schedules.
• Marshall's concept of consumer surplus is highlighted as an important operational
concept in economics, despite some difficulties associated with it. Consumer surplus
refers to the difference between the price a person pays for a good and the maximum
price they would be willing to pay. Marshall applied this concept to analyze various real-
world problems such as monopoly and taxation.
• Overall, the passage addresses the limitations and complexities of Marshall's
method in analyzing long-period supply, external economies, and decreasing costs. It also
discusses Marshall's contributions to demand theory and the concept of consumer
surplus.
• It seems that you have provided an excerpt from a text discussing Alfred
Marshall's economic theories and their applications. Marshall was an influential
economist who made significant contributions to microeconomic theory and welfare
economics. His work focused on the analysis of supply and demand, consumer surplus,
monopoly, and externalities.
• In the excerpt you provided, Marshall's analysis of the effects of taxes and
subsidies on different types of industries is discussed. He examined the welfare effects of
these government interventions in industries characterized by increasing costs, decreasing
costs, and constant costs. Marshall argued that taxing an increasing-cost industry would
reduce consumer welfare, while subsidizing such an industry would reduce welfare as
well. On the other hand, he suggested that decreasing-cost industries could be subsidized
to increase overall welfare, while constant-cost industries should neither be taxed nor
subsidized.
• Marshall also addressed the measurement of utility and welfare, acknowledging
the difficulties in quantifying and comparing utility levels among individuals. He
highlighted the importance of making value judgments when assessing the welfare effects
of taxation and subsidization.
• Furthermore, Marshall's work touched on the concept of externalities, which are
the spillover effects of economic activities on third parties. He recognized the presence of
external economies, which are positive externalities that benefit firms within industries.
This concept later contributed to the development of theories on market failure and the
need for government intervention to address externalities.
• Overall, Marshall's theories and analyses continue to be influential in the field of
economics, particularly in microeconomic theory and welfare economics.
• The excerpt you provided is from a discussion on Alfred Marshall's contributions
to microeconomics, specifically regarding the concepts of elasticity, factor demand, and
optimal resource allocation. Marshall was a prominent economist in the late 19th and
early 20th centuries, known for his work in neoclassical economics.
• Elasticity, as conceptualized by Marshall, refers to the responsiveness of one
variable to changes in another variable. Marshall discussed price elasticity of demand,
which measures the percentage change in quantity demanded divided by the percentage
change in price. He categorized demand as elastic if the elasticity is greater than 1,
inelastic if less than 1, and unit elastic if equal to 1. Marshall also noted factors that
determine the elasticity of demand, such as the proportion of the individual's budget spent
on the commodity, the duration of price changes, the availability of substitutes, and the
number of uses for the commodity.
• Marshall extended the concept of elasticity to factor demand, which refers to the
derived demand for productive inputs (e.g., labor, capital, land). He explained that the
demand for a factor of production can be derived from the demand for the final product
by subtracting the supply prices of other factors. Marshall illustrated this concept using
examples of plasterers' labor and knife handles in the production of knives. He also
discussed equilibrium in factor markets, where inputs are hired up to the point where
their marginal product equals their marginal cost.
• In terms of resource allocation and the distribution of product, Marshall advocated
for the efficient allocation of resources by employing factors of production up to the point
where their marginal product equals their marginal cost. He referred to this as the
principle of substitution. Marshall recognized the role of fixed factors in the short run and
introduced the concept of quasi-rent, which represents a return to temporarily fixed
factors in the short run. In the long run, returns to fixed investments must be covered by
market prices.
• Marshall also addressed the issue of labor supply, stating that it is influenced by
the marginal productivity of labor in both the short run and the long run. In the short run,
labor supply is determined by the intersection of the marginal disutility of labor and the
marginal utility of real income. In the long run, the supply of labor is governed by the
cost of producing labor, which includes the acquisition of skills and education. Marshall
acknowledged the influence of human capital and the costs borne by individuals or their
families to acquire marketable skills.
• Overall, Alfred Marshall's contributions to microeconomics, particularly in the
areas of elasticity, factor demand, and resource allocation, have had a significant impact
on economic theory and analysis.
MCQs
What was Alfred Marshall's primary area of study?
a) Metaphysics
b) Ethics
c) Political economy
d) Mathematics
Answer: c) Political economy
Which of the following economists was NOT influenced by Alfred Marshall?
a) John Maynard Keynes
b) Léon Walras
c) A.C. Pigou
d) Adam Smith
Answer: d) Adam Smith
Marshall believed that an over-reliance on mathematical models in economics could lead
to:
a) Unrealistic assumptions
b) Clear communication
c) Empirical facts
d) Historical knowledge
Answer: a) Unrealistic assumptions
Marshall's methodology focused on refining common sense through organized analysis
and reason. True or False?
Answer: True
Marshall's analysis of the fishing industry observed that average-cost functions in the
industry are:
a) Increasing
b) Decreasing
c) U-shaped
d) Constant
Answer: c) U-shaped
In the short run, Marshall focused on factors that would affect the market for fish given
an increase in demand. True or False?
Answer: True
Marshall's conception of time in economics contributed to his:
a) Partial equilibrium approach
b) General equilibrium approach
c) Macroeconomic analysis
d) Microeconomic analysis
Answer: a) Partial equilibrium approach
Marshall introduced the concepts of internal and external economies. True or False?
Answer: True
External economies refer to positive externalities that benefit firms within industries.
True or False?
Answer: True
According to Marshall, perfect competition cannot coexist with external economies and
decreasing costs because it may lead to:
a) Monopoly
b) Multiplant production
c) Constant costs
d) Increasing costs
Answer: b) Multiplant production
Marshall's concept of consumer surplus refers to:
a) The difference between price and cost
b) The difference between price and marginal cost
c) The difference between price and average cost
d) The difference between price and the maximum price a person is willing to pay
Answer: d) The difference between price and the maximum price a person is willing to
pay
Marshall's analysis of the effects of taxes and subsidies suggests that taxing an
increasing-cost industry would:
a) Increase consumer welfare
b) Decrease consumer welfare
c) Have no impact on consumer welfare
d) Increase producer welfare
Answer: b) Decrease consumer welfare
Marshall categorized demand as elastic if the price elasticity of demand is:
a) Less than 1
b) Equal to 1
c) Greater than 1
d) Undefined
Answer: c) Greater than 1
Marshall extended the concept of elasticity to factor demand, which refers to the derived
demand for:
a) Final products
b) Labor
c) Capital
d) Substitutes
Answer: b) Labor
According to Marshall, efficient resource allocation is achieved when the marginal
product of a factor of production equals:
a) Its average product
b) Its marginal cost
c) Its fixed cost
d) Its total cost
Answer: b) Its marginal cost