SlideShare ist ein Scribd-Unternehmen logo
1 von 40
Downloaden Sie, um offline zu lesen
1.The Neoclassical School - Pure competition:
• Neoclassical Economics is the name given to an economic theory that
was developed at the end of the 19th and the beginning of the 20th Century
in Europe.
• The main contributors to this theory were Léon Walras (1834-1910),
Alfred Marshall (1842-1924) and Vilfredo Pareto (1848-1923).
1
2019/20
at least three differences between the earlier marginalists and later neoclassical
economists can be discerned.
I. First, neoclassical thought stressed both demand and supply in determining the
market prices of goods, services, and resources, whereas the earlier marginalists tended
to stress demand alone.
II. Second, several of the neoclassical economists took a far greater interest in the role
of money in the economy than did the earlier marginalists.
III. Finally, neoclassical economists extended marginal analysis to market structures
other than pure competition, pure monopoly, and duopoly.
2
2019/20
• Neoclassical school is a school of economic thought based chiefly on the
writings, Alfred Marshall (1842-1924), and those who followed his ideas and
elaborated upon his doctrines.
• It follows closely the findings of the classical school but emphasizes the
limitation some of the classical doctrines, notably that of laissez faire.
• It makes use of the conception of marginal utility and accepts mathematical
economic as one method of presentation.
• In the world of neo classical economics, the focus of analytical attention was
directed to the process through which a market system allocates an economy’s
resources.
• From the point of view of the neo-classical economists the problem deserving
study was the functioning of the market system and its role as an allocator of
resources. 3
2019/20
Difference between classical and neo-classical approach
• The difference between classical and orthodox theory Classical and neoclassical
theories are distinguished in terms of their themes in analyzing economy,
methodology, and value theory.
I. In terms of themes in analyzing economy: The question of Economics Classical
economists investigated two central economic questions:
 what causes an economy to grow?
 What determines the distribution of income into its three forms of wages, rent and
profit?
 The classical theme is the accumulation and allocation of surplus output, and therefore their emphasis
was on production and on the factors that influence the supply of goods.
 Neoclassical economics, unlike its classical predecessor, focuses on individual choices, which
unavoidably reflect subjective preferences and beliefs, and the allocation of given resources among
alternative uses. 4
2019/20
 the Classical theory paid comparatively little attention to choices of
individuals.
 The classical economists did not believe that there was much of general interest to be
said about the preferences of or choices of individuals. Instead, they divided agents into
three major classes: capitalists with their capital or stocks of accumulated goods,
landlords with their land, and workers with their ability to work.
 Neoclassical economics is a term variously used for approaches to
economics focusing on the determination of prices, outputs, and income
distributions in markets through supply and demand, often mediated
through a hypothesized maximization of utility by income-constrained
individuals and of profits by cost-constrained firms employing available
information and factors of production, in accordance with rational choice
theory.
5
2019/20
• Neoclassical economics dominates microeconomics, and
together with Keynesian economics forms the neoclassical
synthesis which dominates mainstream economics today.
• Although neoclassical economics has gained widespread
acceptance by contemporary economists, there have been
many critiques of neoclassical economics, often
incorporated into newer versions of neoclassical theory as
awareness of economic criteria changes.
6
2019/20
II. The aspect of methodology
A. Holism vs. Individualism: Methodological holism is a view, according to which properties of
individual elements in a complex are taken to be determined by relations they bear to other
elements.
 Methodological individualism, however, is the view that all social events must be explained as
consequences of choices made by individuals and allows only individuals to be the decision-
makers in explaining social phenomena.
 Accordingly, methodological individualism does not allow explanations which involve non-
individualist decision makers such as institutions.
 Classical economic theories, in general, explained the social phenomena in terms of
methodological holism.
 Their primary interests are social entities such as capitalist society. Moreover, classical
economists develop their theory in terms of class such as landlords, workers and capitalists who
contest for a larger share of the pie, instead of abstract individuals.
 In a classical paradigm, the concept of class is more useful than individual agents in analyzing
social phenomena. In this way, classical economy has roots in holism, and accommodates social
categories like class. 7
2019/20
Usually the neoclassical economics is firmly grounded on a research
program of methodological individualism, which generally posits that
individuals with given preferences and endowments, and firms with
given technologies, enter the market process as autonomous
entities.
For neoclassical economists, society is the collection of individuals.
Individual wants, thoughts, and deeds combine to make society what
it is.
To understand an economy is then to make sense of the aggregate
effects of individual wants and acts.
Neoclassical theory does this by demonstrating how individuals
maximize their material self-interests by utilizing their resources and
the available technology in market transactions. 8
2019/20
B. Historical vs. Ahistorical: In classical economics tradition,
historical analysis is called for and mathematical models and statistical investigations
are of limited usefulness.
 The classical economists have made consistent efforts to explain the rise of the
capitalist mode of production in terms of historical analysis.
 The classical theory of value would be limited to the goods and services that were
typical products of competitive capitalism.
 They regarded the explanation of this historical phenomenon as their primary
task.
 the starting point of neoclassical economics is the ahistorical individual and
therefore the neoclassical theories are expressed in mathematical models which
exclude the concept of history.
 This methodological features arises from the fact that though the great themes of
classical economy are dynamic and developmental, the great themes of
neoclassical economy are static and allocational. 9
2019/20
C. On value theory:
In terms of explanations of what determines the value of different
commodities, the different approaches have tended to distinguish
two notions of value: the cost of producing the commodity
reflected by the supply of it, or determined by the utility it gives a
consumer, and reflected in the demand for it.
The classical economists found value to be determined in
production.
They were not, however, very concerned about demand as a
determinant of value.
10
2019/20
• Neoclassical economists view value in terms of the relationship
between costs of production and subjective elements, called supply
and demand.
• Generally, for neoclassical economics, the value of a commodity is
determined only by its subjective scarcity, i.e. the degree to which
people’s desire for that a commodity exceeds its availability.
• It is the Marginal Theory of Value or subjective theory of value.
Typically, the neoclassical answer to these value questions involves
the specification and use of what might be called market analysis.
• Markets are considered locations or sites where values are
determined.
11
2019/20
• Alfred Marshall
12
2019/20
• Among the Anglo-Saxon neo-classical pioneers, Alfred Marshall is
considered one of two contenders for the title of father of
neoclassical microeconomic theory (the other being Leon Walras).
• Building on the work of Smith, Ricardo, and J. S. Mill, Marshall
developed an analytical framework that still serves today as the
structural basis of current undergraduate economic theory and much
economic policy.
• Marshall was the great synthesizer, seeking to combine the best of
classical economics with marginalist thinking, hence producing
“neoclassical” economics.
13
2019/20
• To Marshall also goes credit for the concept of price elasticity of
demand, and consumer surplus.
• Marshall also introduced the concept of producer surplus, the amount
the producer is actually paid minus the amount that he would willingly
accept.
• Marshall used these concepts to measure the changes in wellbeing from
government policies such as taxation.
• Although economists have refined the measures since Marshall’s time,
his basic approach to what is now called welfare economics still stands.
14
2019/20
• Wanting to understand how markets adjust to changes in supply or demand
over time, Marshall introduced the idea of three periods.
I. First is the market period, the amount of time for which the stock of a
commodity is fixed.
II. Second, the short period is the time in which the supply can be increased
by adding labour and other inputs but not by adding capital (Marshall’s
term was “appliances”).
III. Third, the long period is the amount of time taken for capital (“appliances”)
to be increased.
 To make economics dynamic rather than static, Marshall used the tools of
classical mechanics, including the concept of optimization.
 Marshall was arguing that the economy is an evolutionary process in which
technology, market institutions, and people’s preferences evolve along with
people’s behavior. 15
2019/20
• His specialty was Microeconomics—the study of individual markets and
industries, as opposed to the study of the whole economy.
• He is also credited with an attempt to put economics on a more
mathematical footing and the first professor of economics at the University
of Cambridge, his 1890 work Principles of Economics abandoned the term
"political economy" for his favorite "economics".
• He viewed math as a way to simplify economic reasoning.
• In his most important book, Principles of Economics, 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.
• Modern economists trying to understand why the price of a good change, still
start by looking for factors that may have shifted demand or supply, an
approach developed by Marshall. 16
2019/20
• According to Marshall, demand is based on the law of diminishing
marginal utility.
• Marshall introduced two important qualifications to hold the law of
diminishing marginal utility. These are , the time period should be too
short and consumer goods that are indivisible.
• Marshall said, “Money measures utility and disutility.”
• Marshall’s law of demand follows directly from his notions of diminishing
marginal utility and rational consumer choice.
• Marshall illustrated the law of demand with both a table and a demand
curve.
17
2019/20
• Marshall laid the foundation for the currently accepted analysis
of cost and supply that is taught in undergraduate courses.
• His most important contribution to the theory of supply was his
concept of the time period, particularly the short run and the
long run.
• Generally according to Marshall Supply is governed by cost of
production and Shape of the Supply curve is governed by the
concept of the time period.
• For purposes of exposition, Marshall divided time into three
periods: (1) the immediate present, (2) the short run, and (3) the
long run. 18
2019/20
• Fisher
19
2019/20
• Fisher’s Theory of Interest: In his The Rate of Interest, published in 1906, and in
his revised and expanded version of this theory The Theory of Interest in 1930
Fisher perceived two factors interacting to establish the interest rate: the
impatience rate and the investment opportunity rate.
• The impatience rate is the extent of the community’s willingness to obtain
present consumption (income) by giving up future consumption (income).
• The less impatient, the more it is willing to save and invest, thereby gaining
future consumption.
• The more impatient, the less it is willing to give up present consumption (to save)
in order to obtain goods in the future.
• the investment opportunity rate is determined by real factors such as the
quantity and quality of resources and the state of technology.
• as people cut back present consumption to increase investment and thereby to
obtain greater future consumption, the rate of return on investment—the
investment opportunity rate—falls. 20
2019/20
• the less we save and invest as a society, the lower is the relative value of
present consumption (Fisher’s impatience rate) and the higher is the
marginal rate of return on investment.
• The equilibrium interest rate will occur where the rate of return on
investment and the rate at which society is willing to trade off present for
future consumption are equal.
• Fisher distinguished real rate of interest from monetary or nominal
interest rate.
• Nominal interest rate is the sum of real interest rate and expected
inflation rate. If the expected rate of inflation is 5% and the real interest
rate is 5%, then the nominal rate of interest will be about 10%.
• Lenders demand 10% to ensure that borrowers return the full purchasing
power of the principal on top of the real interest rate. This effect of
inflation on nominal interest rate is known as fisher’s effect.
21
2019/20
• Fisher’s the Quantity Theory of Money: Fisher restated and
amplified the old quantity theory of money based on the
equation of exchange.
• Fisher saw five determinants of the purchasing power of money,
or its inverse, the price level: (1) the volume of currency in
circulation (M), (2) its velocity of circulation (V), (3) the volume of
bank deposits subject to check (M’), (4) its velocity(velocity of
bank deposits (V’)), and (5) the volume of trade (T).
• MV + M’V’ = PT Where; P is the average level of prices, which
vary directly with the quantity of M & M’ and vary inversely with
the volume of trade (T).
22
2019/20
• Monetary Policy: He advocated that; this might be achieved using
paper money redeemable on demand with a quantity of gold that
would represent constant purchasing power.
• According to Fisher the scheme for stabilizing is increased prices
leads increase the gold content, and reduced prices leads reduce
the gold content.
• Fisher believed price fluctuations cause business fluctuations, not
otherwise.
• Therefore, stabilizing prices by controlling the quantity would
eliminate business cycle.
• After 1929, Fisher saw the greatest cause of deflation and
depression as the growth of debts. 23
2019/20
24
F.Y. Edgeworth A.C. Pigou
Cournot
Jevon
Mill
Cambridge
Walras
2019/20
• Theories of imperfect competition are well known within the scope
and tradition of the marginalist or neoclassical school.
• But these theories were not fully developed until the early 1930s. For
example, Cournot was developed models of pure monopoly and
duopoly as early as 1838, and that Edgeworth and Wicksell was
analyzed situations in which the demand curves faced by competitors
were less than perfectly elastic.
• But the interest in imperfect competition arose because of the gap in
economic theory between the pure models of competition and
monopoly and because the theory of pure competition was becoming
increasingly untenable and applied most fully to agriculture.
25
2019/20
• According to many economists, the neoclassical theory of pure
competition had even less direct applicability to modern industrial
production and trade than to agriculture.
• Today most economists would agree that the pure competition
model provides important insights into the nature and outcomes of
competition but does not accurately describe most national and
international markets.
• showing how monopolies can raise prices above the competitive
equilibrium level to yield economic profits over the long run, the
theories concerning departure from pure competition were
influential in creating a greater willingness among economists to
accept more vigorous government antitrust policies and
government regulation of the profits of utility monopolies.
26
2019/20
• Sraffa presents a well-defined theory, but it is important to remember
that both pure competition and natural monopoly are extreme cases.
• In industries with few firms, competitive forces can still prevail.
• Sraffa is correct, however, that two conditions can break up the purity
of markets: (1) a single producer can affect market price by varying the
quantity of goods it offers for sale; (2) each producer may engage in
production under circumstances of individual decreasing costs.
• Both conditions have more characteristics of monopoly than pure
competition.
• Sraffa said that this expansion of output is limited because of
monopoly pricing since many firms work under diminishing costs.
27
2019/20
• Edward Hastings Chamberlin published his The Theory of Monopolistic Competition in 1933.
• This important book fused the previously separate theories of monopoly and competition,
and it sought to explain a range of market situations that are neither purely competitive nor
totally monopolistic.
• Chamberlin held that most market prices are actually determined by both monopolistic and
competitive elements.
• The Theory of Monopolistic Competition: A key concept of the theory of monopolistic
competition is that of
• product differentiation. Which means it is possible to differentiate the goods (or services) of
one seller from the others. T
• his implies that each firm’s demand curve slopes downward, and therefore its marginal
revenue curve must lie below the demand, or average revenue curve.
• Chamberlin was among the first of many theorists in the late 1920s and early 1930s who
applied the idea of marginal revenue implicit in Cournot’s monopoly model.
28
2019/20
• According to Chamberlin, only where a firm enjoys significant monopoly will
its price exceed average cost in both the short and long runs.
• Where many firms operate under monopolistic competition, free entry into
the industry will eliminate monopoly profit in the long run.
• As more firms offer to sell goods that are close, although imperfect,
substitutes for each other, each producer can sell fewer goods at each price
than formerly.
• Long-run equilibrium occurs when each seller’s total revenue just equals its
total cost (or average revenue equals average cost). Because a normal profit
is considered to be a cost, the firm is earning only a normal profit. Such a
profit is one that does not attract further entry into the industry, nor causes
firms to exit. 29
2019/20
30
• long-time professor of economics at Cambridge University, was a
student of Alfred Marshall.
• Her book, The Economics of Imperfect Competition, was
published a few months after Chamberlin’s and covers
substantially the same ground.
• In the decades following its appearance in 1933, Robinson
expanded her activities and made important contributions in
Keynesian and Post- Keynesian economics, economic
development, and international trade
2019/20
31
Monopsony: To the concept of monopolistic competition
Robinson added the idea of monopsony, a situation in which
there is either a single buyer in a market or a group of buyers
acting as one.
She analyzed the outcomes of monopsony buying power in
product and resource markets.
2019/20
32
The Cambridge School: Sidgwick’s importance as an economic
thinker has often been underestimated, in part because of his
stormy relationship with Alfred Marshall, who is generally
regarded as the founder of the Cambridge School (Groenewegen,
1995).
Sidgwick was more involved than Marshall in the methodological
debates of the time, seeking to balance both deductive and
inductive approaches, and he was also wary of the evolutionary
metaphors and talk of ‘economic biology’ to which Marshall was
given. 2019/20
33
 John Shield Nicholson (1850-1927):
 Nicholson's attack on utility theory and Marshall's consumer surplus
prompted a brief controversy with F.Y. Edgeworth in the 1894 edition of
the Economic Journal.
 Nicholson did his best to explain all sides of current economic debates --
from the impact of mechanization to the fallacies of Marxism.
 Like his great hero, Adam Smith, Nicholson nurtured a cautious liberal
position, but he was not a doctrinaire laissez-faire apologist.
 Nicholson was a believer in government regulation and anti-trust law, a
bimetallist and a proponent of the under consumption thesis of economic
fluctuations. 2019/20
34
 Wicksell made several major contributions to economics. Such as; he was
one of the earliest economists to suggest that the typical firm will first
experience increasing returns, then constant returns, and finally
decreasing returns as it expands its size.
 But Wicksell’s chief claim to fame lies in his contributions to monetary
economics.
 These advancements include (1) an analysis of the role of interest rates in
achieving an equilibrium price level or in generating cumulative inflationary
or deflationary movements; (2) recognition of the potential contribution of
the government and the central bank in retarding or promoting price
stability; and (3) an early statement of the saving-investment approach to
macroeconomic equilibrium. 2019/20
35
This last contribution established Wicksell as the father of
the so-called Stockholm school of economics.
In addition, his work became one of the sources of
Keynesian economics; Keynes himself complimented
Wicksell as an important precursor of his own ideas.
Wicksell’s overall objective was to synthesize monetary
theory, business-cycle theory, public finance, and price
theory into one system.
2019/20
36
On the Price Level Changes: Why do prices collectively rise
or fall? To answer this question, Wicksell try to analysis
interest rates and distinguished the normal or natural rate
of interest and the bank rate.
The normal or natural rate of interest, he said, depends
on supply and demand for real capital that is not yet
invested.
The supply of capital flows from those who postpone
consuming part of their income and thereby accumulate
wealth.
2019/20
37
Wicksell’s implication for public policy: Wicksell’s analysis
of interest rates and his predilection for reform led him to
emphasize the role of government and the central bank in
promoting economic stability.
In his Interest and Prices, published in 1898, he became
the first economist to advocate stabilizing wholesale
prices by controlling discount and interest rates.
He was the first economist to advocate stabilizing
wholesale prices by controlling discount and interest
rates.
2019/20
38
Wicksell on forced saving: Assuming full employment through a
bank loan financing of a new enterprise, more land and labor would be
employed in producing capital goods.
 This leaves fewer resources for consumer goods production.
 However, the demand for consumer goods increases rather than diminish
as income from labor and land increases with the bidding up of prices by
entrepreneurs.
 With the resulting rises in prices entrepreneurs would acquire fewer
capital goods and consumers restrict their consumption. i.e will be forced
to save.
2019/20
39
Wicksell on Imperfect Competition: Wicksell
recognized the inadequacy of the purely
competitive model in retail markets, thus
anticipating by several decades the theory of
monopolistic or imperfect competition
proposed by Edward Chamberlin and Joan
Robinson.
2019/20
40
2019/20

Weitere ähnliche Inhalte

Was ist angesagt?

Monetarist and keynesian school of thoughts
Monetarist and keynesian school of thoughtsMonetarist and keynesian school of thoughts
Monetarist and keynesian school of thoughtsSana Hassan Afridi
 
classical vs Keynesian theory.pptx
classical vs Keynesian theory.pptxclassical vs Keynesian theory.pptx
classical vs Keynesian theory.pptxSnehal Athawale
 
Keynesian economics
Keynesian economicsKeynesian economics
Keynesian economicsBinduHA
 
school of Thought in Economics
school of Thought in Economics school of Thought in Economics
school of Thought in Economics Rabbia Javed
 
J.b.say
J.b.sayJ.b.say
J.b.sayU6410
 
Mercantilism and-the-physiocrats
Mercantilism and-the-physiocratsMercantilism and-the-physiocrats
Mercantilism and-the-physiocratsSana Hassan Afridi
 
General equilibrium : Neo-classical analysis
General equilibrium : Neo-classical analysisGeneral equilibrium : Neo-classical analysis
General equilibrium : Neo-classical analysisSnehal Athawale
 
Classical Economists
Classical EconomistsClassical Economists
Classical Economistsvigneswaran81
 
Classical & keynesian economics
Classical & keynesian economicsClassical & keynesian economics
Classical & keynesian economicsRanganadh Emmadi
 
Theories of economic growth
Theories of economic growthTheories of economic growth
Theories of economic growthVaibhav verma
 
Brief review of Adam Smith's main concepts of growth.
Brief review of Adam Smith's main concepts of growth.Brief review of Adam Smith's main concepts of growth.
Brief review of Adam Smith's main concepts of growth.Prabha Panth
 
Monetarism
MonetarismMonetarism
MonetarismU6410
 
Classical theory of economics
Classical theory of economicsClassical theory of economics
Classical theory of economicsAvijit Palit
 

Was ist angesagt? (20)

Monetarist and keynesian school of thoughts
Monetarist and keynesian school of thoughtsMonetarist and keynesian school of thoughts
Monetarist and keynesian school of thoughts
 
History of Economic Thought
History of Economic ThoughtHistory of Economic Thought
History of Economic Thought
 
Theory of growth
Theory of growthTheory of growth
Theory of growth
 
classical vs Keynesian theory.pptx
classical vs Keynesian theory.pptxclassical vs Keynesian theory.pptx
classical vs Keynesian theory.pptx
 
Keynesian economics
Keynesian economicsKeynesian economics
Keynesian economics
 
school of Thought in Economics
school of Thought in Economics school of Thought in Economics
school of Thought in Economics
 
Classical economic thought
Classical economic thoughtClassical economic thought
Classical economic thought
 
History of economic thought
History of economic thoughtHistory of economic thought
History of economic thought
 
J.b.say
J.b.sayJ.b.say
J.b.say
 
Mercantilism and-the-physiocrats
Mercantilism and-the-physiocratsMercantilism and-the-physiocrats
Mercantilism and-the-physiocrats
 
General equilibrium : Neo-classical analysis
General equilibrium : Neo-classical analysisGeneral equilibrium : Neo-classical analysis
General equilibrium : Neo-classical analysis
 
Classical Economists
Classical EconomistsClassical Economists
Classical Economists
 
Classical & keynesian economics
Classical & keynesian economicsClassical & keynesian economics
Classical & keynesian economics
 
Theories of economic growth
Theories of economic growthTheories of economic growth
Theories of economic growth
 
Brief review of Adam Smith's main concepts of growth.
Brief review of Adam Smith's main concepts of growth.Brief review of Adam Smith's main concepts of growth.
Brief review of Adam Smith's main concepts of growth.
 
Keynesian theory
Keynesian theoryKeynesian theory
Keynesian theory
 
Monetarism
MonetarismMonetarism
Monetarism
 
Leon Walras.ppt
Leon Walras.pptLeon Walras.ppt
Leon Walras.ppt
 
HISTORY OF ECONOMIC THOUGHT - GREEKS
HISTORY OF ECONOMIC THOUGHT - GREEKSHISTORY OF ECONOMIC THOUGHT - GREEKS
HISTORY OF ECONOMIC THOUGHT - GREEKS
 
Classical theory of economics
Classical theory of economicsClassical theory of economics
Classical theory of economics
 

Ähnlich wie History of Economics Thought II ch1.pptx

1 Introduction to Econ for NET Commernce.pdf
1 Introduction to Econ for NET Commernce.pdf1 Introduction to Econ for NET Commernce.pdf
1 Introduction to Econ for NET Commernce.pdfjagangopuA
 
Theories of economics
Theories of economicsTheories of economics
Theories of economicsPrashanth v
 
BNF 1113 Introduction to Microeconomics.pptx
BNF 1113 Introduction to Microeconomics.pptxBNF 1113 Introduction to Microeconomics.pptx
BNF 1113 Introduction to Microeconomics.pptxsadiqfarhan2
 
Business economics
Business economicsBusiness economics
Business economicsvibuchandran
 
Economic development
Economic developmentEconomic development
Economic developmentArif Z-lee
 
APPLIED ECONOMICS.pptx
APPLIED ECONOMICS.pptxAPPLIED ECONOMICS.pptx
APPLIED ECONOMICS.pptxivy buncaras
 
Assingment economics1
Assingment economics1Assingment economics1
Assingment economics1mskrt_shomrat
 
Nani mebd 1st module
Nani mebd 1st moduleNani mebd 1st module
Nani mebd 1st moduleVikram g b
 
Definition Nature Scope and Significance of Economics, Business Economics - D...
Definition Nature Scope and Significance of Economics, Business Economics - D...Definition Nature Scope and Significance of Economics, Business Economics - D...
Definition Nature Scope and Significance of Economics, Business Economics - D...Divyansh Agrawal
 
Froyen_10th Editionn.pdf
Froyen_10th Editionn.pdfFroyen_10th Editionn.pdf
Froyen_10th Editionn.pdfanjalimittal47
 
The Theories Of Neo Classical Economics
The Theories Of Neo Classical EconomicsThe Theories Of Neo Classical Economics
The Theories Of Neo Classical EconomicsAmy Moore
 
Microeconomics
MicroeconomicsMicroeconomics
MicroeconomicsWBUAFS
 
Assignment 1_Group 4 Marginalist School.pptx
Assignment 1_Group 4 Marginalist School.pptxAssignment 1_Group 4 Marginalist School.pptx
Assignment 1_Group 4 Marginalist School.pptxYanYingLoh
 
INTRODUCTION TO Micro Econ.pdf
INTRODUCTION TO Micro Econ.pdfINTRODUCTION TO Micro Econ.pdf
INTRODUCTION TO Micro Econ.pdfsocialsites1
 
F.y.b.a. economics - eng (rev)
F.y.b.a.   economics - eng (rev)F.y.b.a.   economics - eng (rev)
F.y.b.a. economics - eng (rev)i134747
 
Economics concept and values
Economics concept and valuesEconomics concept and values
Economics concept and valuesrahulmathur
 

Ähnlich wie History of Economics Thought II ch1.pptx (20)

1 Introduction to Econ for NET Commernce.pdf
1 Introduction to Econ for NET Commernce.pdf1 Introduction to Econ for NET Commernce.pdf
1 Introduction to Econ for NET Commernce.pdf
 
Theories of economics
Theories of economicsTheories of economics
Theories of economics
 
BNF 1113 Introduction to Microeconomics.pptx
BNF 1113 Introduction to Microeconomics.pptxBNF 1113 Introduction to Microeconomics.pptx
BNF 1113 Introduction to Microeconomics.pptx
 
Business economics
Business economicsBusiness economics
Business economics
 
Economic development
Economic developmentEconomic development
Economic development
 
APPLIED ECONOMICS.pptx
APPLIED ECONOMICS.pptxAPPLIED ECONOMICS.pptx
APPLIED ECONOMICS.pptx
 
Assingment economics1
Assingment economics1Assingment economics1
Assingment economics1
 
Nani mebd 1st module
Nani mebd 1st moduleNani mebd 1st module
Nani mebd 1st module
 
Unit-1 ECONOMICS.pptx
Unit-1 ECONOMICS.pptxUnit-1 ECONOMICS.pptx
Unit-1 ECONOMICS.pptx
 
Definition Nature Scope and Significance of Economics, Business Economics - D...
Definition Nature Scope and Significance of Economics, Business Economics - D...Definition Nature Scope and Significance of Economics, Business Economics - D...
Definition Nature Scope and Significance of Economics, Business Economics - D...
 
Froyen_10th Editionn.pdf
Froyen_10th Editionn.pdfFroyen_10th Editionn.pdf
Froyen_10th Editionn.pdf
 
The Theories Of Neo Classical Economics
The Theories Of Neo Classical EconomicsThe Theories Of Neo Classical Economics
The Theories Of Neo Classical Economics
 
Microeconomics
MicroeconomicsMicroeconomics
Microeconomics
 
Assignment 1_Group 4 Marginalist School.pptx
Assignment 1_Group 4 Marginalist School.pptxAssignment 1_Group 4 Marginalist School.pptx
Assignment 1_Group 4 Marginalist School.pptx
 
INTRODUCTION TO Micro Econ.pdf
INTRODUCTION TO Micro Econ.pdfINTRODUCTION TO Micro Econ.pdf
INTRODUCTION TO Micro Econ.pdf
 
F.y.b.a. economics - eng (rev)
F.y.b.a.   economics - eng (rev)F.y.b.a.   economics - eng (rev)
F.y.b.a. economics - eng (rev)
 
Economics concept and values
Economics concept and valuesEconomics concept and values
Economics concept and values
 
AAE- 101
AAE- 101AAE- 101
AAE- 101
 
1 b module hmts
1 b module hmts1 b module hmts
1 b module hmts
 
Economics
EconomicsEconomics
Economics
 

Mehr von MagarsaaHirphaa

History of Economics Thought II ch-2.pptx
History of Economics Thought II ch-2.pptxHistory of Economics Thought II ch-2.pptx
History of Economics Thought II ch-2.pptxMagarsaaHirphaa
 
History of Economics Thought II ch-4.pptx
History of Economics Thought II ch-4.pptxHistory of Economics Thought II ch-4.pptx
History of Economics Thought II ch-4.pptxMagarsaaHirphaa
 
Industrial Economics Lecture 8.pptx
Industrial Economics Lecture 8.pptxIndustrial Economics Lecture 8.pptx
Industrial Economics Lecture 8.pptxMagarsaaHirphaa
 
Natural Resource and Environmental Economics Chapter 6.pptx
Natural Resource and Environmental Economics Chapter 6.pptxNatural Resource and Environmental Economics Chapter 6.pptx
Natural Resource and Environmental Economics Chapter 6.pptxMagarsaaHirphaa
 
Industrial Economics Lecture 7.pptx
Industrial Economics Lecture 7.pptxIndustrial Economics Lecture 7.pptx
Industrial Economics Lecture 7.pptxMagarsaaHirphaa
 
Development Economics I Chapter 2.pptx
Development Economics I Chapter 2.pptxDevelopment Economics I Chapter 2.pptx
Development Economics I Chapter 2.pptxMagarsaaHirphaa
 
Industrial Economics Lecture 4.pptx
Industrial Economics Lecture 4.pptxIndustrial Economics Lecture 4.pptx
Industrial Economics Lecture 4.pptxMagarsaaHirphaa
 
Industrial Economics Lecture 5.pptx
Industrial Economics Lecture 5.pptxIndustrial Economics Lecture 5.pptx
Industrial Economics Lecture 5.pptxMagarsaaHirphaa
 

Mehr von MagarsaaHirphaa (8)

History of Economics Thought II ch-2.pptx
History of Economics Thought II ch-2.pptxHistory of Economics Thought II ch-2.pptx
History of Economics Thought II ch-2.pptx
 
History of Economics Thought II ch-4.pptx
History of Economics Thought II ch-4.pptxHistory of Economics Thought II ch-4.pptx
History of Economics Thought II ch-4.pptx
 
Industrial Economics Lecture 8.pptx
Industrial Economics Lecture 8.pptxIndustrial Economics Lecture 8.pptx
Industrial Economics Lecture 8.pptx
 
Natural Resource and Environmental Economics Chapter 6.pptx
Natural Resource and Environmental Economics Chapter 6.pptxNatural Resource and Environmental Economics Chapter 6.pptx
Natural Resource and Environmental Economics Chapter 6.pptx
 
Industrial Economics Lecture 7.pptx
Industrial Economics Lecture 7.pptxIndustrial Economics Lecture 7.pptx
Industrial Economics Lecture 7.pptx
 
Development Economics I Chapter 2.pptx
Development Economics I Chapter 2.pptxDevelopment Economics I Chapter 2.pptx
Development Economics I Chapter 2.pptx
 
Industrial Economics Lecture 4.pptx
Industrial Economics Lecture 4.pptxIndustrial Economics Lecture 4.pptx
Industrial Economics Lecture 4.pptx
 
Industrial Economics Lecture 5.pptx
Industrial Economics Lecture 5.pptxIndustrial Economics Lecture 5.pptx
Industrial Economics Lecture 5.pptx
 

Kürzlich hochgeladen

MoneyBridge Pitch Deck - Investor Presentation
MoneyBridge Pitch Deck - Investor PresentationMoneyBridge Pitch Deck - Investor Presentation
MoneyBridge Pitch Deck - Investor Presentationbaron83
 
Graham and Doddsville - Issue 1 - Winter 2006 (1).pdf
Graham and Doddsville - Issue 1 - Winter 2006 (1).pdfGraham and Doddsville - Issue 1 - Winter 2006 (1).pdf
Graham and Doddsville - Issue 1 - Winter 2006 (1).pdfAnhNguyen97152
 
Chicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdf
Chicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdfChicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdf
Chicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdfSourav Sikder
 
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGUNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGlokeshwarmaha
 
Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...
Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...
Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...IMARC Group
 
Data skills for Agile Teams- Killing story points
Data skills for Agile Teams- Killing story pointsData skills for Agile Teams- Killing story points
Data skills for Agile Teams- Killing story pointsyasinnathani
 
Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access
 
Project Brief & Information Architecture Report
Project Brief & Information Architecture ReportProject Brief & Information Architecture Report
Project Brief & Information Architecture Reportamberjiles31
 
Entrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsEntrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsP&CO
 
Fabric RFID Wristbands in Ireland for Events and Festivals
Fabric RFID Wristbands in Ireland for Events and FestivalsFabric RFID Wristbands in Ireland for Events and Festivals
Fabric RFID Wristbands in Ireland for Events and FestivalsWristbands Ireland
 
Live-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry WebinarLive-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry WebinarNathanielSchmuck
 
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...
NewBase  25 March  2024  Energy News issue - 1710 by Khaled Al Awadi_compress...NewBase  25 March  2024  Energy News issue - 1710 by Khaled Al Awadi_compress...
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...Khaled Al Awadi
 
Introduction to The overview of GAAP LO 1-5.pptx
Introduction to The overview of GAAP LO 1-5.pptxIntroduction to The overview of GAAP LO 1-5.pptx
Introduction to The overview of GAAP LO 1-5.pptxJemalSeid25
 
The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003
The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003
The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003believeminhh
 
Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024Borderless Access
 
Tata Kelola Bisnis perushaan yang bergerak
Tata Kelola Bisnis perushaan yang bergerakTata Kelola Bisnis perushaan yang bergerak
Tata Kelola Bisnis perushaan yang bergerakEditores1
 
PDT 89 - $1.4M - Seed - Plantee Innovations.pdf
PDT 89 - $1.4M - Seed - Plantee Innovations.pdfPDT 89 - $1.4M - Seed - Plantee Innovations.pdf
PDT 89 - $1.4M - Seed - Plantee Innovations.pdfHajeJanKamps
 
Mihir Menda - Member of Supervisory Board at RMZ
Mihir Menda - Member of Supervisory Board at RMZMihir Menda - Member of Supervisory Board at RMZ
Mihir Menda - Member of Supervisory Board at RMZKanakChauhan5
 
Developing Coaching Skills: Mine, Yours, Ours
Developing Coaching Skills: Mine, Yours, OursDeveloping Coaching Skills: Mine, Yours, Ours
Developing Coaching Skills: Mine, Yours, OursKaiNexus
 

Kürzlich hochgeladen (20)

MoneyBridge Pitch Deck - Investor Presentation
MoneyBridge Pitch Deck - Investor PresentationMoneyBridge Pitch Deck - Investor Presentation
MoneyBridge Pitch Deck - Investor Presentation
 
Graham and Doddsville - Issue 1 - Winter 2006 (1).pdf
Graham and Doddsville - Issue 1 - Winter 2006 (1).pdfGraham and Doddsville - Issue 1 - Winter 2006 (1).pdf
Graham and Doddsville - Issue 1 - Winter 2006 (1).pdf
 
Chicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdf
Chicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdfChicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdf
Chicago Medical Malpractice Lawyer Chicago Medical Malpractice Lawyer.pdf
 
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGUNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
 
Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...
Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...
Boat Trailers Market PPT: Growth, Outlook, Demand, Keyplayer Analysis and Opp...
 
Data skills for Agile Teams- Killing story points
Data skills for Agile Teams- Killing story pointsData skills for Agile Teams- Killing story points
Data skills for Agile Teams- Killing story points
 
Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024
 
Project Brief & Information Architecture Report
Project Brief & Information Architecture ReportProject Brief & Information Architecture Report
Project Brief & Information Architecture Report
 
Entrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsEntrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizations
 
Fabric RFID Wristbands in Ireland for Events and Festivals
Fabric RFID Wristbands in Ireland for Events and FestivalsFabric RFID Wristbands in Ireland for Events and Festivals
Fabric RFID Wristbands in Ireland for Events and Festivals
 
Live-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry WebinarLive-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry Webinar
 
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...
NewBase  25 March  2024  Energy News issue - 1710 by Khaled Al Awadi_compress...NewBase  25 March  2024  Energy News issue - 1710 by Khaled Al Awadi_compress...
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...
 
Introduction to The overview of GAAP LO 1-5.pptx
Introduction to The overview of GAAP LO 1-5.pptxIntroduction to The overview of GAAP LO 1-5.pptx
Introduction to The overview of GAAP LO 1-5.pptx
 
Investment Opportunity for Thailand's Automotive & EV Industries
Investment Opportunity for Thailand's Automotive & EV IndustriesInvestment Opportunity for Thailand's Automotive & EV Industries
Investment Opportunity for Thailand's Automotive & EV Industries
 
The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003
The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003
The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003
 
Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024
 
Tata Kelola Bisnis perushaan yang bergerak
Tata Kelola Bisnis perushaan yang bergerakTata Kelola Bisnis perushaan yang bergerak
Tata Kelola Bisnis perushaan yang bergerak
 
PDT 89 - $1.4M - Seed - Plantee Innovations.pdf
PDT 89 - $1.4M - Seed - Plantee Innovations.pdfPDT 89 - $1.4M - Seed - Plantee Innovations.pdf
PDT 89 - $1.4M - Seed - Plantee Innovations.pdf
 
Mihir Menda - Member of Supervisory Board at RMZ
Mihir Menda - Member of Supervisory Board at RMZMihir Menda - Member of Supervisory Board at RMZ
Mihir Menda - Member of Supervisory Board at RMZ
 
Developing Coaching Skills: Mine, Yours, Ours
Developing Coaching Skills: Mine, Yours, OursDeveloping Coaching Skills: Mine, Yours, Ours
Developing Coaching Skills: Mine, Yours, Ours
 

History of Economics Thought II ch1.pptx

  • 1. 1.The Neoclassical School - Pure competition: • Neoclassical Economics is the name given to an economic theory that was developed at the end of the 19th and the beginning of the 20th Century in Europe. • The main contributors to this theory were Léon Walras (1834-1910), Alfred Marshall (1842-1924) and Vilfredo Pareto (1848-1923). 1 2019/20
  • 2. at least three differences between the earlier marginalists and later neoclassical economists can be discerned. I. First, neoclassical thought stressed both demand and supply in determining the market prices of goods, services, and resources, whereas the earlier marginalists tended to stress demand alone. II. Second, several of the neoclassical economists took a far greater interest in the role of money in the economy than did the earlier marginalists. III. Finally, neoclassical economists extended marginal analysis to market structures other than pure competition, pure monopoly, and duopoly. 2 2019/20
  • 3. • Neoclassical school is a school of economic thought based chiefly on the writings, Alfred Marshall (1842-1924), and those who followed his ideas and elaborated upon his doctrines. • It follows closely the findings of the classical school but emphasizes the limitation some of the classical doctrines, notably that of laissez faire. • It makes use of the conception of marginal utility and accepts mathematical economic as one method of presentation. • In the world of neo classical economics, the focus of analytical attention was directed to the process through which a market system allocates an economy’s resources. • From the point of view of the neo-classical economists the problem deserving study was the functioning of the market system and its role as an allocator of resources. 3 2019/20
  • 4. Difference between classical and neo-classical approach • The difference between classical and orthodox theory Classical and neoclassical theories are distinguished in terms of their themes in analyzing economy, methodology, and value theory. I. In terms of themes in analyzing economy: The question of Economics Classical economists investigated two central economic questions:  what causes an economy to grow?  What determines the distribution of income into its three forms of wages, rent and profit?  The classical theme is the accumulation and allocation of surplus output, and therefore their emphasis was on production and on the factors that influence the supply of goods.  Neoclassical economics, unlike its classical predecessor, focuses on individual choices, which unavoidably reflect subjective preferences and beliefs, and the allocation of given resources among alternative uses. 4 2019/20
  • 5.  the Classical theory paid comparatively little attention to choices of individuals.  The classical economists did not believe that there was much of general interest to be said about the preferences of or choices of individuals. Instead, they divided agents into three major classes: capitalists with their capital or stocks of accumulated goods, landlords with their land, and workers with their ability to work.  Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory. 5 2019/20
  • 6. • Neoclassical economics dominates microeconomics, and together with Keynesian economics forms the neoclassical synthesis which dominates mainstream economics today. • Although neoclassical economics has gained widespread acceptance by contemporary economists, there have been many critiques of neoclassical economics, often incorporated into newer versions of neoclassical theory as awareness of economic criteria changes. 6 2019/20
  • 7. II. The aspect of methodology A. Holism vs. Individualism: Methodological holism is a view, according to which properties of individual elements in a complex are taken to be determined by relations they bear to other elements.  Methodological individualism, however, is the view that all social events must be explained as consequences of choices made by individuals and allows only individuals to be the decision- makers in explaining social phenomena.  Accordingly, methodological individualism does not allow explanations which involve non- individualist decision makers such as institutions.  Classical economic theories, in general, explained the social phenomena in terms of methodological holism.  Their primary interests are social entities such as capitalist society. Moreover, classical economists develop their theory in terms of class such as landlords, workers and capitalists who contest for a larger share of the pie, instead of abstract individuals.  In a classical paradigm, the concept of class is more useful than individual agents in analyzing social phenomena. In this way, classical economy has roots in holism, and accommodates social categories like class. 7 2019/20
  • 8. Usually the neoclassical economics is firmly grounded on a research program of methodological individualism, which generally posits that individuals with given preferences and endowments, and firms with given technologies, enter the market process as autonomous entities. For neoclassical economists, society is the collection of individuals. Individual wants, thoughts, and deeds combine to make society what it is. To understand an economy is then to make sense of the aggregate effects of individual wants and acts. Neoclassical theory does this by demonstrating how individuals maximize their material self-interests by utilizing their resources and the available technology in market transactions. 8 2019/20
  • 9. B. Historical vs. Ahistorical: In classical economics tradition, historical analysis is called for and mathematical models and statistical investigations are of limited usefulness.  The classical economists have made consistent efforts to explain the rise of the capitalist mode of production in terms of historical analysis.  The classical theory of value would be limited to the goods and services that were typical products of competitive capitalism.  They regarded the explanation of this historical phenomenon as their primary task.  the starting point of neoclassical economics is the ahistorical individual and therefore the neoclassical theories are expressed in mathematical models which exclude the concept of history.  This methodological features arises from the fact that though the great themes of classical economy are dynamic and developmental, the great themes of neoclassical economy are static and allocational. 9 2019/20
  • 10. C. On value theory: In terms of explanations of what determines the value of different commodities, the different approaches have tended to distinguish two notions of value: the cost of producing the commodity reflected by the supply of it, or determined by the utility it gives a consumer, and reflected in the demand for it. The classical economists found value to be determined in production. They were not, however, very concerned about demand as a determinant of value. 10 2019/20
  • 11. • Neoclassical economists view value in terms of the relationship between costs of production and subjective elements, called supply and demand. • Generally, for neoclassical economics, the value of a commodity is determined only by its subjective scarcity, i.e. the degree to which people’s desire for that a commodity exceeds its availability. • It is the Marginal Theory of Value or subjective theory of value. Typically, the neoclassical answer to these value questions involves the specification and use of what might be called market analysis. • Markets are considered locations or sites where values are determined. 11 2019/20
  • 13. • Among the Anglo-Saxon neo-classical pioneers, Alfred Marshall is considered one of two contenders for the title of father of neoclassical microeconomic theory (the other being Leon Walras). • Building on the work of Smith, Ricardo, and J. S. Mill, Marshall developed an analytical framework that still serves today as the structural basis of current undergraduate economic theory and much economic policy. • Marshall was the great synthesizer, seeking to combine the best of classical economics with marginalist thinking, hence producing “neoclassical” economics. 13 2019/20
  • 14. • To Marshall also goes credit for the concept of price elasticity of demand, and consumer surplus. • Marshall also introduced the concept of producer surplus, the amount the producer is actually paid minus the amount that he would willingly accept. • Marshall used these concepts to measure the changes in wellbeing from government policies such as taxation. • Although economists have refined the measures since Marshall’s time, his basic approach to what is now called welfare economics still stands. 14 2019/20
  • 15. • Wanting to understand how markets adjust to changes in supply or demand over time, Marshall introduced the idea of three periods. I. First is the market period, the amount of time for which the stock of a commodity is fixed. II. Second, the short period is the time in which the supply can be increased by adding labour and other inputs but not by adding capital (Marshall’s term was “appliances”). III. Third, the long period is the amount of time taken for capital (“appliances”) to be increased.  To make economics dynamic rather than static, Marshall used the tools of classical mechanics, including the concept of optimization.  Marshall was arguing that the economy is an evolutionary process in which technology, market institutions, and people’s preferences evolve along with people’s behavior. 15 2019/20
  • 16. • His specialty was Microeconomics—the study of individual markets and industries, as opposed to the study of the whole economy. • He is also credited with an attempt to put economics on a more mathematical footing and the first professor of economics at the University of Cambridge, his 1890 work Principles of Economics abandoned the term "political economy" for his favorite "economics". • He viewed math as a way to simplify economic reasoning. • In his most important book, Principles of Economics, 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. • Modern economists trying to understand why the price of a good change, still start by looking for factors that may have shifted demand or supply, an approach developed by Marshall. 16 2019/20
  • 17. • According to Marshall, demand is based on the law of diminishing marginal utility. • Marshall introduced two important qualifications to hold the law of diminishing marginal utility. These are , the time period should be too short and consumer goods that are indivisible. • Marshall said, “Money measures utility and disutility.” • Marshall’s law of demand follows directly from his notions of diminishing marginal utility and rational consumer choice. • Marshall illustrated the law of demand with both a table and a demand curve. 17 2019/20
  • 18. • Marshall laid the foundation for the currently accepted analysis of cost and supply that is taught in undergraduate courses. • His most important contribution to the theory of supply was his concept of the time period, particularly the short run and the long run. • Generally according to Marshall Supply is governed by cost of production and Shape of the Supply curve is governed by the concept of the time period. • For purposes of exposition, Marshall divided time into three periods: (1) the immediate present, (2) the short run, and (3) the long run. 18 2019/20
  • 20. • Fisher’s Theory of Interest: In his The Rate of Interest, published in 1906, and in his revised and expanded version of this theory The Theory of Interest in 1930 Fisher perceived two factors interacting to establish the interest rate: the impatience rate and the investment opportunity rate. • The impatience rate is the extent of the community’s willingness to obtain present consumption (income) by giving up future consumption (income). • The less impatient, the more it is willing to save and invest, thereby gaining future consumption. • The more impatient, the less it is willing to give up present consumption (to save) in order to obtain goods in the future. • the investment opportunity rate is determined by real factors such as the quantity and quality of resources and the state of technology. • as people cut back present consumption to increase investment and thereby to obtain greater future consumption, the rate of return on investment—the investment opportunity rate—falls. 20 2019/20
  • 21. • the less we save and invest as a society, the lower is the relative value of present consumption (Fisher’s impatience rate) and the higher is the marginal rate of return on investment. • The equilibrium interest rate will occur where the rate of return on investment and the rate at which society is willing to trade off present for future consumption are equal. • Fisher distinguished real rate of interest from monetary or nominal interest rate. • Nominal interest rate is the sum of real interest rate and expected inflation rate. If the expected rate of inflation is 5% and the real interest rate is 5%, then the nominal rate of interest will be about 10%. • Lenders demand 10% to ensure that borrowers return the full purchasing power of the principal on top of the real interest rate. This effect of inflation on nominal interest rate is known as fisher’s effect. 21 2019/20
  • 22. • Fisher’s the Quantity Theory of Money: Fisher restated and amplified the old quantity theory of money based on the equation of exchange. • Fisher saw five determinants of the purchasing power of money, or its inverse, the price level: (1) the volume of currency in circulation (M), (2) its velocity of circulation (V), (3) the volume of bank deposits subject to check (M’), (4) its velocity(velocity of bank deposits (V’)), and (5) the volume of trade (T). • MV + M’V’ = PT Where; P is the average level of prices, which vary directly with the quantity of M & M’ and vary inversely with the volume of trade (T). 22 2019/20
  • 23. • Monetary Policy: He advocated that; this might be achieved using paper money redeemable on demand with a quantity of gold that would represent constant purchasing power. • According to Fisher the scheme for stabilizing is increased prices leads increase the gold content, and reduced prices leads reduce the gold content. • Fisher believed price fluctuations cause business fluctuations, not otherwise. • Therefore, stabilizing prices by controlling the quantity would eliminate business cycle. • After 1929, Fisher saw the greatest cause of deflation and depression as the growth of debts. 23 2019/20
  • 24. 24 F.Y. Edgeworth A.C. Pigou Cournot Jevon Mill Cambridge Walras 2019/20
  • 25. • Theories of imperfect competition are well known within the scope and tradition of the marginalist or neoclassical school. • But these theories were not fully developed until the early 1930s. For example, Cournot was developed models of pure monopoly and duopoly as early as 1838, and that Edgeworth and Wicksell was analyzed situations in which the demand curves faced by competitors were less than perfectly elastic. • But the interest in imperfect competition arose because of the gap in economic theory between the pure models of competition and monopoly and because the theory of pure competition was becoming increasingly untenable and applied most fully to agriculture. 25 2019/20
  • 26. • According to many economists, the neoclassical theory of pure competition had even less direct applicability to modern industrial production and trade than to agriculture. • Today most economists would agree that the pure competition model provides important insights into the nature and outcomes of competition but does not accurately describe most national and international markets. • showing how monopolies can raise prices above the competitive equilibrium level to yield economic profits over the long run, the theories concerning departure from pure competition were influential in creating a greater willingness among economists to accept more vigorous government antitrust policies and government regulation of the profits of utility monopolies. 26 2019/20
  • 27. • Sraffa presents a well-defined theory, but it is important to remember that both pure competition and natural monopoly are extreme cases. • In industries with few firms, competitive forces can still prevail. • Sraffa is correct, however, that two conditions can break up the purity of markets: (1) a single producer can affect market price by varying the quantity of goods it offers for sale; (2) each producer may engage in production under circumstances of individual decreasing costs. • Both conditions have more characteristics of monopoly than pure competition. • Sraffa said that this expansion of output is limited because of monopoly pricing since many firms work under diminishing costs. 27 2019/20
  • 28. • Edward Hastings Chamberlin published his The Theory of Monopolistic Competition in 1933. • This important book fused the previously separate theories of monopoly and competition, and it sought to explain a range of market situations that are neither purely competitive nor totally monopolistic. • Chamberlin held that most market prices are actually determined by both monopolistic and competitive elements. • The Theory of Monopolistic Competition: A key concept of the theory of monopolistic competition is that of • product differentiation. Which means it is possible to differentiate the goods (or services) of one seller from the others. T • his implies that each firm’s demand curve slopes downward, and therefore its marginal revenue curve must lie below the demand, or average revenue curve. • Chamberlin was among the first of many theorists in the late 1920s and early 1930s who applied the idea of marginal revenue implicit in Cournot’s monopoly model. 28 2019/20
  • 29. • According to Chamberlin, only where a firm enjoys significant monopoly will its price exceed average cost in both the short and long runs. • Where many firms operate under monopolistic competition, free entry into the industry will eliminate monopoly profit in the long run. • As more firms offer to sell goods that are close, although imperfect, substitutes for each other, each producer can sell fewer goods at each price than formerly. • Long-run equilibrium occurs when each seller’s total revenue just equals its total cost (or average revenue equals average cost). Because a normal profit is considered to be a cost, the firm is earning only a normal profit. Such a profit is one that does not attract further entry into the industry, nor causes firms to exit. 29 2019/20
  • 30. 30 • long-time professor of economics at Cambridge University, was a student of Alfred Marshall. • Her book, The Economics of Imperfect Competition, was published a few months after Chamberlin’s and covers substantially the same ground. • In the decades following its appearance in 1933, Robinson expanded her activities and made important contributions in Keynesian and Post- Keynesian economics, economic development, and international trade 2019/20
  • 31. 31 Monopsony: To the concept of monopolistic competition Robinson added the idea of monopsony, a situation in which there is either a single buyer in a market or a group of buyers acting as one. She analyzed the outcomes of monopsony buying power in product and resource markets. 2019/20
  • 32. 32 The Cambridge School: Sidgwick’s importance as an economic thinker has often been underestimated, in part because of his stormy relationship with Alfred Marshall, who is generally regarded as the founder of the Cambridge School (Groenewegen, 1995). Sidgwick was more involved than Marshall in the methodological debates of the time, seeking to balance both deductive and inductive approaches, and he was also wary of the evolutionary metaphors and talk of ‘economic biology’ to which Marshall was given. 2019/20
  • 33. 33  John Shield Nicholson (1850-1927):  Nicholson's attack on utility theory and Marshall's consumer surplus prompted a brief controversy with F.Y. Edgeworth in the 1894 edition of the Economic Journal.  Nicholson did his best to explain all sides of current economic debates -- from the impact of mechanization to the fallacies of Marxism.  Like his great hero, Adam Smith, Nicholson nurtured a cautious liberal position, but he was not a doctrinaire laissez-faire apologist.  Nicholson was a believer in government regulation and anti-trust law, a bimetallist and a proponent of the under consumption thesis of economic fluctuations. 2019/20
  • 34. 34  Wicksell made several major contributions to economics. Such as; he was one of the earliest economists to suggest that the typical firm will first experience increasing returns, then constant returns, and finally decreasing returns as it expands its size.  But Wicksell’s chief claim to fame lies in his contributions to monetary economics.  These advancements include (1) an analysis of the role of interest rates in achieving an equilibrium price level or in generating cumulative inflationary or deflationary movements; (2) recognition of the potential contribution of the government and the central bank in retarding or promoting price stability; and (3) an early statement of the saving-investment approach to macroeconomic equilibrium. 2019/20
  • 35. 35 This last contribution established Wicksell as the father of the so-called Stockholm school of economics. In addition, his work became one of the sources of Keynesian economics; Keynes himself complimented Wicksell as an important precursor of his own ideas. Wicksell’s overall objective was to synthesize monetary theory, business-cycle theory, public finance, and price theory into one system. 2019/20
  • 36. 36 On the Price Level Changes: Why do prices collectively rise or fall? To answer this question, Wicksell try to analysis interest rates and distinguished the normal or natural rate of interest and the bank rate. The normal or natural rate of interest, he said, depends on supply and demand for real capital that is not yet invested. The supply of capital flows from those who postpone consuming part of their income and thereby accumulate wealth. 2019/20
  • 37. 37 Wicksell’s implication for public policy: Wicksell’s analysis of interest rates and his predilection for reform led him to emphasize the role of government and the central bank in promoting economic stability. In his Interest and Prices, published in 1898, he became the first economist to advocate stabilizing wholesale prices by controlling discount and interest rates. He was the first economist to advocate stabilizing wholesale prices by controlling discount and interest rates. 2019/20
  • 38. 38 Wicksell on forced saving: Assuming full employment through a bank loan financing of a new enterprise, more land and labor would be employed in producing capital goods.  This leaves fewer resources for consumer goods production.  However, the demand for consumer goods increases rather than diminish as income from labor and land increases with the bidding up of prices by entrepreneurs.  With the resulting rises in prices entrepreneurs would acquire fewer capital goods and consumers restrict their consumption. i.e will be forced to save. 2019/20
  • 39. 39 Wicksell on Imperfect Competition: Wicksell recognized the inadequacy of the purely competitive model in retail markets, thus anticipating by several decades the theory of monopolistic or imperfect competition proposed by Edward Chamberlin and Joan Robinson. 2019/20