Notesale: Turn your study into money

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Marginalist Revolution and Neoclassical School: (1870 – 1930) (Following Marx’s Das Kapital)
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In 1871 Jevons and Menger attacked classical theory’s almost exclusive emphasis on
supply
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Laissez faire, for
example, seemed hardly appropriate in light of the poor living and working conditions of
the growing population of English factory workers
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The period
was also characterized by the questioning of the classical assumption that laissez-faire was
an ideal government policy and the eventual demise of classical economic theory and the
transition to neoclassical economics
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4
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Their main idea was that value, or price of a commodity depends on upon the
marginal utility of the commodity to the consumer
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By
the 1890s, several economists, realizing that this tool could be applied to the forces that
determined the distribution of income, developed the concept of the marginal productivity
of factors
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The three main Marginalist Theorists:
1
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- Jevons and Marginal utility theorists had elaborated a theory of value based on the idea of
maximizing utility, holding that value depends on demand
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- It is incorrect to view the process of price determination as a simple chain of causal
relationships in which utility determines demand, which then determines price, or cost
determines supply, which then determines price
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We go to the margin to examine the
forces at work and to improve our understanding of them, but when we go to the margin,
we find that utility, cost, and price mutually determine one another’s values and that simple
causal chains do not exist
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Jevons, Walras,

Commented [OA1]: Jevons, Menger and Walras
contributed plenty to the development of economic theory
by their expansion of the use of marginal analysis
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Commented [OA2]: 1
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The utility function is additive and separable
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second law: “The magnitude of each single pleasure at a
moment when it’s enjoyable is broken off shall be the same
for all pressure” which means that maximum satisfaction
will be achieved when goods and needs are allocated and
they provide the maximum utility
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2
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- Menger attacked the labor theory of value, expressing his view that the factor determining
the value of a good is not the amount of work nor other goods needed to produce it, but the
importance we place on the basis of the satisfaction we believe it can offer
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Leon Walras:
- Another co-founder of marginalism and theory of utility
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- This general equilibrium was reached by changes in price that would gradually
approximate supply and demand until a steady state is reached
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- Pareto’s answer to the question of evaluating the efficiency of resource allocation was
straightforward: a change in resource allocation will improve welfare if one person can be
made better off with no other person’s being made worse off
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- Before Walras, economists had made little attempt to show how a whole economy with
many goods fits together and reaches an equilibrium
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He
failed, but he took some major first steps
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The demonstration that price and
quantity were uniquely determined for each commodity is considered one of Walras’s
greatest contributions to economic science
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So Walras’s second major step was to simulate an artificial market
process that would get the system to equilibrium, a process he called “tâtonnement”
- General equilibrium theory in macroeconomics shows how supply and demand in a multimarket economy interact and create an equilibrium of prices
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It took the tools introduced by marginalism and saw them
to construct much further reaching theories
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Commented [OA3]: A market system is in competitive
equilibrium when prices are set in such a way that
the market clears, or in other words, demand and
supply are equalised
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Following the first fundamental
theorem of welfare economics, this equilibrium must
be Pareto efficient
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Partial equilibrium analysis allows only
a small number of variables to vary; all others are assumed
constant
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Neoclassical economics is a broad theory that focuses on supply and demand as the driving
forces behind the production, pricing, and consumption of goods and services
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Neoclassical economics theories underlie modern-day economics, along with the tenets of
Keynesian economics
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This coincides with rational behavior theory since neoclassicals believed that a
consumer’s first concern is to maximize personal satisfaction
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While classical economic theory assumes that a product’s
value derives from the cost of production, neoclassicals say that consumer perceptions of
the value of a product affect its price and demand
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The theory emphasizes the importance of savings and capital accumulation together
with exogenously determined technical progress as the sources of economic growth
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This economic theory states that competition leads to an efficient allocation of resources
within an economy
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They
rejected Marxism and believed that the market system will ensure a fair allocation
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Alfred Marshall:
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Marshall is regarded as the true founder of the neoclassical school of economics which
combined the study of wealth distribution of the classical school and marginalism of the
Austrian school
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Marshall contributed to economic science
with concepts such as price elasticity, and the further development of other subjects,
surpluses for instance
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His own methodology attempts to
blend the theoretical, mathematical, and historical approaches
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He was committed to partial equilibrium models over general equilibrium o the grounds
that the inherently dynamical nature of economics made the former more practically useful
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In it Marshall emphasized that the
price and output of a good are determined by both supply and demand: the two curves are
like scissor blades that intersect at equilibrium, which we now know as the Marshallian
Cross
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They owe this approach to
Marshall
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It is
useful for contextual argumentation
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He was the first to develop the standard supply and demand graph demonstrating a number
of fundamentals about supply and demand, including the supply and demand curves,
market equilibrium, the relationship between quantity and price in regards to supply and
demand, the law of marginal utility, the law of diminishing returns, and the ideas of
consumer and producer surpluses
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Marshall was one of those who used utility analysis, but not as a theory of value
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Marshall’s scissors analysis effectively removed the theory of value from the center of
analysis and replaced it with the theory of price
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Prices no longer were thought to gravitate toward some ultimate and absolute basis of price;
prices were existential, between the relationship of demand supply
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The shorter
the period, the more important the role of demand in determining price; the longer the
period, the more important the role of supply
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Marginal utility or marginal cost does not determine price, for their values along with price
are mutually determined by factors acting on the margin
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In the short tun where supply is not readily changeable, demand
determines the price
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In this time period, the price of the commodity must be high enough to cover these costs
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He used his distinction between fixed and variable costs in the short run to show that a
firm would continue to operate in the short run even if it was incurring a loss, as long as it
was covering its total variable costs
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Shutting down would result in a loss equal to total fixed costs, but the losses
incurred by operating are less than total fixed costs as long as total revenue exceeds total
variable costs
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Marshall was an important part of the “marginalist revolution”, the idea that consumers
attempt to adjust consumption until marginal utility equals the price was another of his
contributions
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He noted that the price is typically the same for each unit of a commodity that a consumer
buys, but the value to the consumer of each additional unit declines
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Therefore, on all units before the last one, the consumer reaps a benefit by paying less than
the value of the good to himself
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Marshall’s disciple A
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Pigou became the father of the partial equilibrium branch of
welfare economics by extending and refining Marshall’s insights into market failures and
externalities
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Because people are not very rational

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