ECN 306 – History of

Economic Thought

Marginalist School of Economic Thought

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At the end of this lecture, the students should be able to:

 Explain the rise of marginalism

 Point out the distinguishing features of marginalism

 Discuss Alfred Marshall (1842-1924)

 Analyze Marshall’s major contributions to economic thought

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1. Rise of Marginalism
 
• In 1870, there appeared a new trend in economics, namely marginalism.
• At this time, the reputation of classical economics had started waning due to its dogmatism
and lack of adjustability to time and places.
• This school of thought was the product of several renowned economists like Heimann
Heinrich Gossen (1810-1858) who was considered a German genius, Karl Menger of
Australia (1840-1921), Leon Walras (1834-1910) of Switzerland but born in France and
Alfred Marshall (1842-1924) of England. Others include Stanley Jevons (1835-1882) and
finally J.B. Clark (1847-1938).
 
• Though their works bear a lot of resemblance with the works of classical economists, the
marginalists however focused more on partial (micro-analysis) rather than the broad
(macro), a product of classical.
• The marginalists, for instance, intensively analyzed interest rate, money, price level, levels
of business activities etc.
• Until the Keynesian revolution of 1936 where Keynes concentrated more on the crisis
management orientation, the work of marginalist remained dominant off-shore of the
classical economists.
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• The classicals were given the brand name “materialists” because they overemphasized
the objective side of value and excluded the subjective factors.
• The material and objective considerations of the classical school were questioned by
many economists.
• Thus a marginal revolution took place simultaneously in many countries.
• The marginalist economists offered a new approach to economic theory and it was
known as subjective approach.

• Subjectivity was a reaction against objectivism of the classical economists, human want
is the motivating force in economic life and utility is “the manifestation of the relation
between goods and the wants which they gratify.
• In the opinion of the marginalists, the objective phenomenon depends on subjective ones.
• Ultimately, subjectivism is nothing but individualism. It finds in the individual, the seat
of pleasure and the faculty of deciding among alternative utilities. For them, the
individual is the focal point in all concepts of utility.
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• Subjectivism, thus leads to marginalism since the attention is
concentrated on ‘points’ or ‘degrees.’
• These subjective economists studied the behaviour of man in relation to
his environment.
• The marginalist’s approach was characterized by the use of
mathematical tools-geometry and differential and integral calculus. Its
reasoning and notation were mathematical in nature.
• The method of analysis was primarily deductive and abstract, though
Jevons is known for promoting the use of statistics and statistical tools
also.
• The analysis of this new group of economists was hedonistic in nature,
making use of the concepts of utility and disutility.
 
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1. Distinguishing Features of Marginalism
• 
1.They emphasized the marginal, i.e. the net additional point of change as the most
crucial for decision-making and possibly borrowing from Ricardo’s theory of rent,
for instance where he had maintained that in their investment decisions, investors
always considered the marginal unit of land. They used the concept of ‘margin’ to
explain economic phenomena.
2.They also emphasized the micro rather than macro approach of the classical. For
instance, marginalists emphasize more on individual consumers, individual price
levels and markets and not so much on the aggregate.
3.Their approach of an economy was from the perspective of pure competition. They
believed in the existence of perfect competition. In fact, it was from them that the
theory of the firm took root. It was their belief that with a purely competitive
situation, it was the activities and decisions of the smallest consumer or purchaser
that reflected on the aggregate situation.
4.Their analysis of consumer theory emphasized ‘demand’ as the most important factor
in price determination, i.e. they overlooked the supply side in price determination.
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5. Marginalists further believed that an economy will always attain
equilibrium if all things are equal and there are no interferences. As such,
the economy always is having a tendency to move towards full
employment equilibrium, price equilibrium, etc. And that even when
distortion arises they could only last in the short-run but in the long-run,
the economy would adjust itself for equilibrium.
6. They assume rationality of individual consumers especially in the area of
increasing marginal utility. They also emphasized that the individual was
able to weigh alternative forgone in his consumption of consumer goods
and services and so was then able to rationally allocate his resources.
7. They emphasized their classical position on laissez faire especially that
they were disposed to pure competition, as such, they also did not
support governmental intervention in economic phenomenon.
8. The marginalist school followed an abstract and deductive method.
9. The marginalist analysis is subjective and psychological.
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1.Alfred Marshall (1842-1924)
 
• Born in London, Alfred Marshall is rated the greatest of the marginalists.
• He published Principles of Economics in 1890.
• After Adam smith, it was Marshall that was credited with the most
comprehensive definition of economics, as a science.
• Marshall defined economics as, “the study of mankind in the ordinary
business of life; it examines that part of individual and social action
which is most closely connected with attainments and with the use of
material requisites of wellbeing”.
• Thus it is on the one side a study of wealth and on the other and more
important side, a part of the study of man.
 
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•Marshall departed from the classicals who had

earlier emphasized on profit maximization as the
pre-occupation of economic activity.
•He was able to connect his individual and corporate
analysis in the attainment of material wellbeing.
•Economics thus was able to look beyond an
individual but in addition the attainment of social
needs. Implying for instance, that production was
never complete until what was produced has been
consumed (given that production was for
consumption).
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1.Marshall’s Major Contributions

• Marshall’s major contributions to economic thought are:

1. Marginal utility of demand: In his analysis, Marshall has shown that marginal utility of
a thing, consumed by any individual diminish with every additional unit of the thing
consumed.
• He was also able to derive the law of demand, i.e. that the more the quantity of a
commodity offered for sale, the lower the price that would be bought and vice-versa.
• Furthermore, that the lower the price, the higher the desire of people to acquire it.
• He contended that the demand function was not necessarily based on the law of
diminishing marginal utility but on balancing marginal utilities.
• Marshall also showed that marginal utilities are highest for low income earners than for
high income earners giving that the more commodity one has at his disposal, the lesser
the marginal utility of that particular commodity.
• He has thus advocated for a narrowing of income differentials in society, arguing that by
so doing, the marginal utility of the entire society would be raised.
• He is also credited with the concept of consumer surplus where he has argued that
consumers do enjoy a surplus and deriving from the marginal utility analysis he showed
how this surplus was obtained by using this analysis.
• Figure 1 - Marshall’s Demand and Supply Graph
•  
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From figure 1 above, consumer rent is in triangle DFA, while producer rent is in triangle
AFS and Producers’ expenses is trapezium ASOH. Since DD1 is also MU, it indicates
declining marginal utility for the consumer as he consumes more of the same commodity.
2. Price Elasticity; Marshall also developed a concept of price elasticity through which the
percentage changes in quantity demanded of commodities are related to the percentage changes
of the price of the commodity.
 
• The co-efficient of elasticity = % change in qty
% change in prices
3. Supply and Market Prices; Alfred Marshall had submitted that supply was generally
governed by the cost of production of any given commodity, i.e. that real determinants of
quantity supplied of a commodity was the real cost of doing it while other factors like leisure
foregone do add to the cost of production but were not apparent when determining the price
of the commodity. He then came up with upward-slopping supply curve which implies that
the higher the price of a commodity, the higher the quantity suppliers are willing to supply
(e.g. of tailor at festive periods of Christmas, Sallah, etc. charging higher prices for dresses
and induced by the enhanced prices to work extra-time and make more dresses.
4. Equilibrium Price: Given his background in Mathematics, Marshall was able to combine the
determinants of demand and supply and arrive at equilibrium price, as that price where
supply matches demand.

Figure 2: Equilibrium Price

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Figure 2 above shows the equilibrium price p* where buyers are willing to buy the same
quantity of goods supplied at the same price.

5. Short-run and Long-run Concepts: Marshall is also credited with introducing short-
run and long-run concepts in economic analysis, arguing that the shorter the period,
the greater the influence demand exerts on value and price. He thus defined the short-
run as that period during which supply is not able to respond to any sudden increase in
demand while he referred to long-run as that period long to allow changes in supply
and demand. He was criticized by the classical that there is no short-run since
eventually one will get there at last.
6. Distribution: It was Marshall’s submission that income distribution was determined
by the prices of factors of production in a perfectly competitive economy. For instance,
he maintained that the supply and demand for labour was responsible for wage
determination which was considered as the price for labour rather than the marginal
productivity of labour and the demand for labour earlier held by the classical. Marshall
illustrated that if the supply for labour increases, ceteris-paribus, the price (wages) of
labour will fall.
• 
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7. Interest Rate: On interest rate, Marshall maintained that a
fall in interest rate induces people to consume more and save
less while an increase in interest rate leads to less consumption
and more saving. He thus concluded that interest tended toward
equilibrium where aggregate demand for capital equals to
aggregate supply at the same rate.
8. Profit: He also defined profits as the earning of Management or
the payment for the specialized form of labour, e.g.
entrepreneurship besides land, labour and capital.
9. Others: Marshall also concentrated on other areas of analysis
most of which were micro in nature like the analysis on
increasing and decreasing cost industries, internal and external
economies of scale.
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CONCLUSION
• Marginalism finds its comprehensive application in Marshallian
economics.
• There, a complete integration of the principle is achieved by
explaining the demand, production, supply and their interaction
through the play of marginal increments.
• The theory of marginal utility brought in fundamental changes in the
structure of economic theory and there emerged a system quite
different from the one expounded by the classical economists.
• The development of marginalism had been somewhat slow in the
sense that its traces existed quite early in economic thought.
• The theory did not develop as a widespread movement on a well-
prepared ground, and had to face lots of difficulties in the beginning.