Alfred Marshall
Principles of Economics
Sisi Wang, Jichao Wang,
Jingjing He
Biography
• Born on July 26, 1842 in Bermondsey,
London, England; died on July 13, 1924.
• His father was a bank cashier
• Grew up in the London suburb of
Clapham
• Educated at the Merchant Taylors’
School, Northwood and St John’s
College, Cambridge
• 1885, he became professor of political
economy at Cambridge
• Retired in 1908
Career
• Marshall experienced a mental crisis so that
he gave up physics and switch to philosophy.
• Began with metaphysics and led him to ethics,
specially a version of utilitarianism.
• Ultimately, led him to economics.
• Even as he turned to economics, his ethical
views continued to be a dominant force in his
thinking.
Thoughts interacted with…
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Adam Smith
David Ricardo
John Stuart Mill
Etc…
Principles of Economics
• One of the greatest economic works
• His specialty was microeconomics– the study
of individual markets and industries
• Emphasizes that the price and output of a
good are determined by both supply and
demand
• Modern economists also use Marshall’s
approach to figure out economic problems
Let’s go through his book in details
Research fields and topics
1. On Micro level,
• Wants, utility, and elasticity of demand.
• Agents of Production
 On land
 On labour
 On capital
 On industrial organization
• Theory of equilibrium
• Analysis of marginal values
Research fields and topics
2. On a wider Micro level,
• Distribution of the national labour
 Labour income
 Profits of capital
 Rent on land
Wants, utility, and elasticity of demand
1. Human wants
• Human not only chase the large quantities, but
also good qualities of things.
• Human desires also affected by the common
senses and social activities.
• As man becomes developed, their needs and
wants will also become subtle and various.
• Theory of consumption is not really the scientific
basis of economics…
Wants, utility, and elasticity of demand
2. Consumers’ demand
• Consumers’ demand governs trader’s demand.
• Utility relates to wants and desire.
• Marshall’s opinion:
A person’s demand for a thing should always
“reference to
the prices at which he would buy that amount and other amounts”.
• The law of demand:
The amount demanded increases with a fall in price, and
diminishes with a rise in price.
Wants, utility, and elasticity of demand
3. Elasticity of demands
• Marshall’s description
 “His willingness to purchase the thing … the elasticity of his
wants”.
 The general law of elasticity
 Variations of the general law of elasticity
Normal goods, luxuries, necessaries……
 About people’s tastes and uses
“The demand for things of a higher quality depends much on
sensibility”
 There are difficulties of getting exact lists of demand prices.
a)
b)
c)
Purchasing power is continually changing;
Gradual growth of population and wealth;
Changes in fashion, tastes and habits.
Theory of Equilibrium
1. Prerequisite: market
• “The central point of a market is the public exchange,
mart or auction rooms, where the traders agree to
meet and transact business”.
Theory of Equilibrium
2. Temporary equilibrium
• The simplest equilibrium between desire and effort
• In a barter system, a true equilibrium may not exist.
But this temporary equilibrium will be found in markets.
Theory of Equilibrium
3. Stable equilibrium
• In a stable equilibrium, the law of supply and demand
works as a mechanism
 Free market conditions
 General conditions of demand
 General conditions of supply
• What is meant by equilibrium?
• Such equilibrium is stable: the equilibrium is stable for
displacements in different directions.
Theory of Equilibrium
“When therefore the amount produced (in a unit of
time) is such that the demand price is greater than the
supply price, then sellers receive more than is sufficient
to make it worth their while to bring goods to market to
that amount … On the other hand, when the amount
produced is such that the demand price is less than the
supply price, sellers receive less than is sufficient to make
it worth their while to bring goods to market on that
scale … When the demand price is equal to the supply
price, the amount produced has no tendency either to be
increased or to be diminished; it is in equilibrium”.
—Book V, Chapter III, Section 6
Theory of Equilibrium
3. Stable equilibrium
• In a stable equilibrium, the law of supply and demand
works as a mechanism
 Free market conditions
 General conditions of demand
 General conditions of supply
• What is meant by equilibrium?
• Such equilibrium is stable: the equilibrium is stable for
displacements in different directions.
Analysis based on marginal values
1. Marginal utility and marginal costs
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Marginal utility
 “The part of the thing which he is only just induced to
purchase may be called his marginal purchases … and the
utility of his marginal purchase may be called marginal utility
of the thing to him”.
 The marginal utility of a thing diminishes with every increase
in the amount of it he already has. (The law of diminishing
returns)
 The condition is that we do not suppose for any alteration in
the character or tastes the buyer.
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Marginal cost
Analysis based on marginal values
2. The tendency of diminishing returns
• “An extra return smaller in proportion than he gets for
the last applications of capital and labour that he now
makes, provided of course that there is meanwhile no
perceptible improvement in his agricultural skill”.
• We need not assume that the tendency of diminishing
returns will last forever.
Analysis based on marginal values
3. However, marginal uses and costs do not
govern values.
• Marshall thinks that “but marginal uses do not govern
value; because they, together with value, are
themselves governed by those general relations”.
• What are those general relations?
—The law of demand and supply governs
value.
Theoretical contributions
• Marginalist revolution
• Price elasticity of demand
• Quasi-Rent
• Institutional economic
Marginalism
• Believes economic value is set by the
consumer's marginal utility
• Seeks a level of operation of some activity
that will maximize the net gain from that
activity
Marginalist revolution
• Concern discovery of marginal utility theory,
which occurred in the 1870’s.
• Consumers attempt to adjust consumption
until marginal utility equals the price
The marginal theory of value
• First broached in the 1870s
• Revolutionized economics.
• The value of an item is a reflection of the work
and resources devoted to making it, or the
cost-of-production theory of value.
Price elasticity of demand
Quasi-Rent
• Reward paid to a factor which exceeds its
opportunity cost
• The rent is a necessary incentive for
something
What do quasi-rents compensate for?
• Innovation
• A lot of innovations are hard to patent, but an
industry leader like Microsoft can be
reimbursed for its R&D by winning a leading
position in the market
Institutional economic
• Understanding the role of the evolutionary
process
• Role of institutions in shaping economic
behavior
• Emphasizes a broader study of institutions and
views markets as a result of the complex
interaction of these various institutions
New institutional economics
• Coined by Oliver Williamson in 1975
• Integrates later developments of neoclassical
economics into the analysis
• Has its roots in two articles by Ronald Coase,
"The Nature of the Firm" (1937) and "The
Problem of Social Cost" (1960)
New institutional economics
• Modified Neoclassical framework in
considering both efficiency and distribution
issues
• contrast to traditional institutional economics,
which is critical of mainstream neoclassical
economics
Aspects in current NIE analyses
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organizational arrangements
property rights
transaction costs
credible commitments
modes of governance
ideological values
Reference
• http://en.wikipedia.org/wiki/Alfred_Marshall
• http://www.econlib.org/library/Enc/bios/Mar
shall.html
• http://econfaculty.gmu.edu/bcaplan/quasirent
• Marshall, A. (1890). Principles of Economics:
an Introductory Volume (9th ed.). New York,
NY: Macmillan.