Alfred Marshall Economics - Coursework Example

Alfred Marshall Economics Introduction Alfred Marshall dominated British economics from 1890 and over the first quarter of the twentieth century. His branch of the subject was microeconomics since he focused on individual markets and industries instead of the broad structure of economics. He has been the author of many books based on his subject, among which the most prolific has been his Principles of Economics in which Marshall has stated that price and production level of goods are determined by their supply and demand curves of the market. The two curves meet at a point (scissor effect) when demand and supply becomes equal. He has also studied the idea of price elasticity of demand which defines the response patterns of customers to alteration of price structure of goods. Another area in which Marshall based his research is consumer surplus. It is actually the difference between value of goods to a customers and the actual price of the goods. Marshall also introduced the concept of producers’ surplus which indicates the price at which a producer is willing to sell his goods minus the market value of the goods. All the concepts that he introduced, Marshall used them for studying the benefits of government principles like the taxation. Prior to Marshall’s age, economics was a field where mathematics was rarely used. It was Marshall who made extensive use of mathematics in economics. He has written, “The chief use of pure mathematics is economic questions seems to be in helping a person to write down quickly, shortly and exactly some of his thoughts for his own use; and to make sure that he has enough, and only enough, premises for his conclusions” (Marshall, 2013, p.xi). Alfred Marshall economics According to Marshall, economics is a subject that concerns partly with monetary aspect of an individual’s business life, i.e. wealth, and also economics is concerned with the study of man. Economics explains how a person earns his income from his business and the manner in which he uses his wealth. The character of man undergoes changes by his daily chores and also by the material resources that he obtains. For a family, the amount of money earned has a great impact on its well-being. A family which earns $30 is different from the family which earns $150, and the difference lies in the material things that either family can afford with their income (Marshall, 1898, p.2). Unlike other branches of social science, economics deals with only those actions of human beings which have motives that can be measured in absolute terms and therefore can be scientifically studied. Once a person’s motive can be measured by the sum of money, it can be tested with scientific methods to ascertain the amount of money the person is willing to give up to fulfill his desire (Marshall, 1898, p.34). Marshall has also established a relation between human wants and activities. He has stated that in early age of civilization, men performed their activities with the sole motive of satisfying their wants. However, with the progress of civilization and culture, activities do not only serve the purpose of want satisfaction but activities pave the way for creating new wants for higher quality (Ormazabal, 1995, p.121). Marshall has further explained that “the economist does not attempt to weigh the real value of the higher affections of our nature against those of our lower; he does not balance the love for virtue against the desire for agreeable food. But he estimates the incentives to action by their effects just in the same way as people do in common life” (Marshall, 1898, p.34). For instance, if a man is in dilemma whether to spend few pence on a cigar or on a cup of tea then it can said that he will be deriving equal pleasure from them. Similarly, if two men in identical situation or in the same rank decide to perform equal amount of work like adding one hour to their daily working hours in order to acquire either of two pleasures, then it can be concluded that those pleasures are equal. Next, if we suppose that a man is in dilemma whether to fulfill his own desire of some material thing or help another person who is invalid, then although his mental state changes still for an economist these are “motives to action which are evenly balanced” (Marshall, 1898, p.35). In a narrow sense, an economist needs to know whether the desire which will remain can build a strong character. In broader sense, the economist measures the real value and monetary value of a person’s different desires which motivates the person to take action. However, the monetary values of an individual’s desires do not reflect the real value of the benefits of those desires. Even with equal level of income, different person can derive different levels of happiness and satisfaction in their daily lives. For instance, if two persons each earning $300 will have to give up $1, then although both of them will be compelled to do, each person’s level of dissatisfaction of such sacrifice will not be equal. Similarly, for a poor man one shilling will be worth more than for a rich man. A clerk who earns $100 annually will prefer to walk from home to office even during rain while a clerk who earns $300 annually may ride a bus. This is because when same amount of money is spent by both rich man and poor man then the latter suffers more than the rich man, and any benefits derived from the money is measured in greater sense by the poor man than the rich man. Marshall has developed a theory to prevent this difficulty. According to him, “if we take averages sufficiently broad to cause the personal peculiarities of individuals to counterbalance one another, the money which people of equal incomes will give to obtain a pleasure or avoid a pain is a sufficiently accurate measure of the pleasure or the pain” (Marshall, 1898, p.37). Therefore, the core element of economic is money or the purchasing power of individuals. Money is not the objective of human labour but it is the only means of assessing human motive in a broad perspective. Industry and trade Marshall has studied the industry in developed countries like Great Britain, France, Germany and the United States in order to analyze the techniques of industrial development and business management and their impact on different sections of the society and nations. Marshall has made mentioned about the role played by technological innovations in the industrial growth and progress in Britain. There was the steam engine was not utilized except for pumping before James Watt worked on it. Even the workings of cylinders lacked perfection leading to leakage of steam which means steam power remained expensive till Matthew Boulton perfected the cylinders. Marshall talked about the time gap between scientific innovations and perfections achieved through development of the mechanical processes of the innovations, “the application of scientific principles is constantly ousting established practice; and the new firm can generally buy from a pioneer maker a more efficient and economical plant” (Groenewegen, 2010, p.1255). Marshall has linked this time gap with production firms and market conditions. When the demand for a certain product increases, the firm focuses on increasing its output level. In the initial stage, this increases the cost of production. However, in the long run when the firm expands its production process the cost per unit gets reduced resulting in greater profit. This entire process of a firm’s expansion is defined by Marshall in the context of technological innovations and their applications. While rising cost of production is a short term effect when demand increases, the long term effect is the growth of the firm and its production. A firm can increase its level of output by adapting technological changes, and this will reduce cost considering the rise in market demand will persist in the long run (Groenewegen, 2010, p.1256). Therefore Marshall has summarized that technological changes shape the industry and trade, and it is adaptation of innovations that has made Britain dominate trade and industry from the second half of the eighteenth century to the middle of the nineteenth century. Demand and supply Marshall is an essentially demand and supply economist. He has stated that universally a person’s demand for a certain product decreases if supply of the same increases considering that other factors like price remains constant. The concept of elasticity refers to the pace at which the demand declines. When a demand for a product decreases at a slow rate then increase of price does not significantly affect the purchase level of the product. This happens in case of essential items like milk, the demand for which drops slightly, if any, when the price increases. However, when price per unit drops, then the purchase increases at a considerably high level. On the other hand, when a demand for a product decreases at a fast rate, then any decline of price will not induce consumers to make large purchases of the product. In the first case, a small increase in the price will extend the desire of consumers to make large purchases since the elasticity of demand is high. In the second case, a small drop in the price will not stretch the demand of consumers sufficiently to make significantly large purchases. In this case the elasticity of demand is low. Marshall has also stated that a product has same level of demand elasticity for both rise and fall of price. For instance, if price of tea increases by $1 then consumers will be increasing their purchase of tea and if the price of tea decreases by $1 then consumers will be reducing their purchase of tea. In the broader market context, a product’s elasticity of demand can be measured by surveying the rise or fall of consumer demand in response to fluctuations in price level of the product. Products whose demand changes significantly with any small change in price indicate that they have high elasticity of demand. Marshall has then stated that the elasticity of demand further depends on the social and economic background of consumers. Products which have price level so high that they are not accessible to the poor will have low demand elasticity for the poor. For instance, wine is a fancy for the rich. Even if price of wine drops, the poor will never drink it since the price level even after dropping will not be affordable for the poor. Moreover wine is a luxury item and the poor tend to spend their earnings on essential items. However, rich people will continue drinking wine even if price level increases significantly because for them the increased price will scarcely matter. However, Marshall has ignored further subdivisions of the economic class like there are different levels of rich people and different levels of poor people. Therefore elasticity of demand of same products may differ for different classes, since prices which are low for the rich are actually still for the poor. Then there are other products, mainly essential ones, like salt, cheap medicines and many kinds of flavours which have low prices. The prices are considered low even by the poor class. For these products, further decline of price will not make any significant difference in the demand structure. Products like milk, butter, meat, wool and imported fruits have moderate price level. Any decline in the price will have a strong impact especially on the lower half of the middle class and the working class. The rich people will not alter their consumption level even if there is significant fall in price. This means elasticity of demand for these products is high for the working class and the lower middle class but is low for the rich population. Since Marshall has based his study on Britain, therefore he has said that England has a large number of working class which makes consumption of these goods higher in aggregate compared to the rich. Therefore, in the broader context elasticity of these goods have high elasticity of demand. Marshall also mentions of those goods which are extremely rare like seasoned fruits, rare brands of wine and highly skilled medical care. The price level of these goods and services remain so high that they are more a status symbol for the rich. These goods have demand only from the rich and such demand has high elasticity. For necessary goods, the case is different. For instance, wheat is considered as the cheapest form of food. It is considered that even if wheat becomes scares and price level rises, it will remain as one of the cheapest food item. In that case, demand of wheat has very low demand elasticity since at all times it is cheaper than other food and so most preferable food item for the poor and the middle class. Even when wheat is abundant in the market, the demand still remains same considering it can be consumed in only one way (Marshall, 2013, pp.87-89). Consumers’ surplus and producers’ surplus Marshall has observed that price of every unit of a commodity remains same at a certain period, but a consumer’s demand decreases with each unit he purchases. The consumer will continue to buy a product until he reaches the point where his demand for further units will become zero and hence he will not want to spend any more on that product. Therefore, for every unit before that optimum level, the consumer paid less that the worth of the product to himself. The quantity of benefit is the surplus value of each unit to himself over the actual price. This surplus value is known as the consumer surplus or more precisely the surplus utility that he receives from each unit. The level of consumers’ surplus is not same for every commodity. There are some items like salt, matches, newspapers and postage stamps which consumers will buy at any price level. In case of these items, price level is always lower than what consumers are willing to pay for their satisfaction. This kind of surplus benefit, which a consumer derives from paying low price for a product for which he is ready to pay a higher price, are benefits which the consumers gets from his “opportunities or from his environment” (Marshall, 2013, p.103). Organic growth theory Marshall has defined organic growth as “co-evolution of the economy and the human mind” (p.227). Since the organic growth theory has not been clearly explained by Marshall, therefore it has been largely ignored by economists. However Yamamoto and Egashira (2012) have found this theory significant for several reasons. Since Marshall as an economist had the ultimate goal of eradicating poverty, and therefore he has considered that the organic growth theory if properly understood can play an important contributing role in achieving that goal. In the nineteenth century, for evolution in economics the state or the society was regarded as an organism, and this had significant impact on the introduction of evolutionism in economics. Marshall has stated that his interest in economics was encouraged by the fact that “economics grew and grew in practical urgency, not so much in relation to the growth of wealth as to the quality of life” (Yamamoto & Egashira, 2012, p.234). Marshall has studied organic growth theory as solution to the problems of poverty. One observation made by Marshall is that there is high number of poor people in the UK, a country which is one of the fastest to achieve high economic growth and development. Therefore, he concluded that in this modern world if a country is experiencing developed economy does not mean that the country is free from poverty. This means economic growth of a nation does not imply that poverty will be eliminated. Marshall has noticed that the poor physical, mental and moral health of the poor people is not only because of low or meager income but there are other factors that contribute to their poor living conditions. He has elaborate this point by saying that unskilled labourers do not make the effort to enhance their working ability because they remain lowly motivated by their long working hours on daily basis. Therefore, he has suggested that employers should formulate strategies to reduce the working hours of labourers but at the same time not disturb the level of output, and labourers should strive to educate themselves to increase their efficiency and working capacity. Marshall has insisted that “poverty corrupts the humanity of labor and the primary aim of economics is to solve the problem of poverty” (Yamamoto & Egashira, 2012, p.234). He considers poverty as hindrance to economic growth. According to his organic growth theory, poverty is not caused solely by monetary factors and therefore economics cannot be its only solution. He has addressed ethical issues as another factor for growing poverty, and has insisted that if the ethical aspect remains ignored, then poverty will continue to have negative impact on economic growth of a nation. Marshall has stated that advancement in human conditions is an important element for consistent growth of production which in turn can reduce poverty level of a country. He has focused on education as a vital factor since without education the labour class cannot become aware of technological innovations in the industrial sector (Yamamoto & Egashira, 2012, pp.235-237). Conclusion Alfred Marshall’s economic principles are based on mathematics, and as an economist he has transformed economics into a more scientific profession. His approach towards economics has been more cost oriented as he has stated that in the short the supply curve more or less remains same and so the market price of products is depended more on the demand than supply. This is because supply depends upon industrial output which in turn can be increased through technological innovations in the production process. Marshall is considered as one of the most renowned economists of his time, and his specialty lies in explaining economic principles in lucid manner for the layman. References Groenewegen, P. (2010) Marshall’s treatment of technological change in industry and trade. European Journal of the History of Economic thought, 17(5), 1253-1269 Marshall, A. (1898) Elements of Economics, Vol.I, London: Macmillan & Co. Marshall, A. (2013) Principles of Economics, 8th ed., Hampshire: Palgrave Macmillan Ormazabal, K.M. (1995) The Law of Diminishing Marginal Utility in Alfred Marshall’s Principles of Economics. European Journal of the History of Economic thought, 2(1), 91-126 Yamamoto, K. & Egashira, S. (2012) Marshall’s organic growth theory. European Journal of the History of Economic thought, 19(2), 227-248 Read More