ii. alfred marshall and neoclassical economics

mainstream microeconomics today. used marginalists ideas about individual decision making for demand, classicalists ideas about cost production as basis for supply, and equilibrium of demand supply determines prices.

Leader first gen. Neoclassical economics. math, physics, then econ professor political economy.
coauthored with wife "the Economics of Industry" (1879). as professor taught next gen. british: Arthur C. Pigou, John Maynard Keynes, Joan Robinson.

"Principles of Economics" (1890" big deal still today, microeconomics.

Skeptical of mathematical economic analysis. Very critical of himself.

sick economics definition quote.

First to really do Supply and Demand graphs like that.

Downward-sloping demand curve: assumption that marginal utility of a good declines as the quantity consumed increases. consumers will buy smaller quantities of a good as the price of that good increases. Also the prices of substitutes. as the price of a good increases, the quantity demanded of that good will decrease (movement along D), while the quantity demanded of a substitute good increases (shifting their D right).

Elasticity of demand as a measure of the sensitivity of the quantity demanded to changes in price. price elasticity of demand: the ratio of the percentage change in quantity demanded to the percentage change in price moving along the demand curve. more vertical more inelastic bigger price change smaller quantity change(|price elasticity of demand| < 1) increase in price increase in total expenditures, more horizonal more elastic smaller price change bigger quantity change (|price elasticity of demand| > 1) increase in price decrease in total expenditures.

short run: output can vary by varying the quantity of some inputs while other inputs stay fixed.
long run: all inputs are variable.

Market Period: available output is already produced and quantity of output cannot be increased. if perishable good, supply curve for period is perfectly inelastic, meaning the equil. price is determined entirely by demand. Cost of production will Not affect the price. Marginal Utility is the sole determinant of Price.

the industry short run supply curve is the horizontal summation of the marginal cost curves of the firms in the industry. the firms marginal cost curves and therefore the short run industry supply curve are upward sloping due to the law of diminishing returns.

relationship of short run and long run supply to the cost curves of a firm.

The short-run supply curve S1 is the horizontal summation of the marginal cost curves of the firms in the industry. firm marginal cost and industry short run supply upward sloping due to Law of Diminishing Returns.

the long run supply curve in industry and firm is horizontal.
price increases w d shift right, p > mc: profit so firms enter, s slowly shifts right, returns to mc = p.

demand does not affect price in the long run with horizontal long run supply curve.
conclusion of classical economics that price is determined by the cost of production is correct!!!! xoxo

"prime costs" variable costs
"supplementary costs" fixed costs

industry prices rise, shift d right, new industry price, making profits, firms enter, NOW input costs cost more bc more firms. new increased mc and atc curve and equil - s shifts right BUT not all the way back down. new increased price equil.

the long run supply curve for an increasing cost industry is upward sloping bc input prices rise as the industry expands. the long run equilibrium price depends on both supply and demand.

long run supply curve DOWNWARD SLOPING, due to EXTERNAL ECONOMIES OF SCALE, occuring when the aveage costs of the firm decrease as the output of the industry increases.

external economies of scale are distinguished from internal economies of scale, which occur when the average costs of the firm decrease as the output of the firm increases.

occur when the average costs of the firm decrease as the output of the firm increases.

Long Run Average Costs curve graph shows short run average cost curves ATCs representing different firm sizes, different amounts of capital inputs. LRAC is envelope curve of short run curves.

downward sloping part of LRAC is range of output where there's "economies of scale". larger firms can reduce average cost through increased specialization.

upward sloping part of LRAC is range of output where there's "diseconomies of scale". top management of larger firms have difficulty controlling shirking among employees and lower management.

"horizontal point" of LRAC is constant returns to scale. if all inputs increased by the same portion, output would increase proportionately and average costs would not change.

one very large firm would have lower average cost than many small firms leading to a monopoly.

occur when the average costs of the firm decrease as the output of the industry increases.

mining industry roads example.

not discovered by Marshall, but he named it and used consumer surplus to measure the inefficiencies associated with distortions of markets such as taxes.

area above price and below demand.

so when tax is added, supply curve shifts up by tax amount, makes new equilibrium. depending on the elasticities of curves, either consumer or seller will pay bulk of taxes, and also theres producer and consumer surplus.


The reduction in the total of consumer and producer surplus is the sum of the revenue and excess burden. the excess burden of the tax is a loss to consumers and producers above the amount of revenue collected by the government.