Alfred Marshalls Contribution to Macroeconomic Theory - Assignment Example

ALFRED MARSHALL’S CONTRIBUTION TO MACROECONOMIC THEORY Alfred Marshall was born in July 26, 1842 in Clapham, England. He was born of a devout Evangelical father who was a bank cashier by profession. Marshall grew up in the London suburb of Clapham and attended the Merchant Taylors School and St Johns College, Cambridge, where he received his education. While in these schools Alfred demonstrated an aptitude in mathematics and therefore achieved the rank of Second Wrangler in the 1865 Cambridge Mathematical Tripos (Marshall & Palgrave Connect, 2013). Marshall abandoned physics and switched to philosophy after experiencing a mental crisis. Marshall started with metaphysics, specifically "the philosophical foundation of knowledge, especially in relation to theology." The Metaphysics led Alfred to ethics, specifically a Sidgwickian version of utilitarianism; ethics, on the other hand, led Alfred to economics. This was so because economics played an essential role in the provision of the preconditions for the improvement of the working class. Marshall’s ethical views continued to be a dominant force in his thinking even though he turned to economics (Marshall & Palgrave Connect, 2013). During his time, Marshall was viewed as the most influential economist. In his book Principles of Economics (1881), Marshall brought out the ideas of supply and demand, marginal utility and cost of production into a single whole. As an extension to what he had done, he brought up the elasticity price of demand. He in addition, contributed to the economic welfare both consumer surplus and producer surplus. He developed the standard demand and supply graph which demonstrates a number of basics that regards demand and supply including market equilibrium, law of diminishing returns, supply and demand curves, law of marginal returns, interrelationship between price and quantity with respect to demand and supply, and the ideas of producer and consumer surpluses (Marshall & Palgrave Connect, 2013). Economists now use this model in various forms using different variables in demonstrating several other economic principles. Ideas and theories that could only be explained in words can now be represented visually with the help of this model. Marshall’s models are now critical throughout the study of economics simply because they allow fundamentals or theories being explained to be represented clearly and concisely (Marshall & Palgrave Connect, 2013). Marshall had a vision of dramatic social change which involves the sharp reduction of inequality and the elimination of poverty. He saw that it was the duty of economics to improve material conditions. He believed that such improvements would occur only in connection with political and social forces. His early influence of social philosophy to his later writings and activities is reflected by his interest in socialism, womens education, liberalism, trade unions, poverty and progress (Marshall & Palgrave Connect, 2013). The main reason why such contribution was made by Marshall was to reconcile the classical and modern theories if value. John Stuart Mill in examination of the relationship between the value of commodities and their production costs argued that value depends on the effort expended in the manufacturing process. In contrast, marginal utility theorists argued that in order to maximize utility, the value should depend on demand. In order to reconcile this discrepancy, Marshall used both the approaches but focusing more on costs. He noted that market value depends mainly on demand in the short run because supply cannot be changed. Production can be expanded in an intermediate time period by the existing facilities like machinery and building but due to the fact that these factors do not require renewal within this period, their costs such as overhead, fixed, or supplementary costs influence the sale price of the product to a little extent (Marshall & Palgrave Connect, 2013). He therefore noted that sale price in this period is mainly influenced by prime or variable costs because they constantly recur. Because machines and buildings are subjected to wear and tear, the product’s sale price must be high enough to cover for replacement costs because the machines have to be replaced. Marshalls greatest contributions to economic theory are his emphasis to the element of time and classification of costs into variable and fixed (Marshall & Palgrave Connect, 2013). The graph below shows the actual demand and supply curve. It is a simplified representation of the otherwise complex economic factors affecting the society and the business community in particular. It represents the law of marginal utility, law of diminishing returns, and the concept of consumer and producer surpluses. This graph is critical for individual economic units i.e. the consumer and the producer that contribute to the overall business activities affecting the current market. Fig 1: Alfred Marshalls supply and demand graph The main concern of business practitioners is to maximize the value of a business. This is achieved through profit maximization. This is the process by which firms select the price and output level that yields the greatest return. Marshall argued that the price of a good or a service is determined by forces of demand and supply (Marshall & Palgrave Connect, 2013). Firms should therefore set prices that ensure that a high level of output is sold so that high profit is realized. This in turn increases the firm’s value in the end. On the other hand, Marshall argued that prices are affected by costs; it is the duty of firms to ensure that costs are maintained at low level so that high profits should be realized. This is due to the fact that profit is the difference between total revenue and total cost. Firms should therefore focus in maximizing this difference. Marshall also points out that in order to improve business performance, firms need to employ specialization principle in their day to day operations as this ensures that high quality products are manufactured. Specialization also leads to mass production which in turn increases the volume of sales and hence high profit (Marshall & Palgrave Connect, 2013). Marshall’s contribution is very important to country’s or national economy in the various ways. It leads to economic growth of a country due to increased quality of commodities and high profits. It also helps in the control of public expenditure. This is because it ensures sustainable use of public funds due to the reduction of unnecessary costs v. It therefore ensures that a lot of attention is given to development expenditure at the expense of recurrent once. Reference Marshall, A., & Palgrave Connect (Online service). (2013). Principles of economics. Read More