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Archer Jirasirikul, Jean Tumvijin, Cathy Shang Kuan
Mr. Robert E. Dell
Introduction to Economics
2011/10/11
Alfred Marshall and His Contribution to the Study of Economics
Alfred Marshall, the 1992 Nobel Prize winner in economics, was born in a London
suburb on July 26, 1842. At a young age, Marshall showed particular interest in the field of
mathematics and physics, and later on, in economics. As years pass by, the young boy grew
up to become a successful young man, who made several accomplishments: first as the
Professor of Political Economy at the University of Cambridge, then as the founder of the
Cambridge School of Economics, and then he succeeded in the election to a Fellowship at St.
John’s. However, even though he was already very successful in his economic career, he
continued to purify his ideas and knowledge about economics and to deepen his
understandings about the economic literature, economic reality, and other economic areas. [2]
Until today, even though he had passed away since July 13, 1924 at the age of 81, he is still
greatly known for his tremendous contributions to the study of Economics, which includes
the supply and demand curve, the elasticity of demand, and the idea of consumer surplus and
producer surplus. [4]
In this world of advancing technology and quickening of goods production, the supply
and demand curve is often needed by economists. However, to some, the idea of supply and
demand curve may not be very familiar and clear. The word supply means the amount of
product that a market can offer, and therefore, the quantity supplied is the amount of goods
that producers are willing to supply at a certain price. On the other hand, demand deals with
the amount of a product that is wanted by the consumers; therefore, the quantity demanded is
the amount of a product that people will want at a certain price. [5] Putting concepts together,
one can see that price is a reflection of both the supply and the demand. The relationship
Jirasirikul, Tumvijin, Shang Kuan 3
between supply and demand are often plotted (also known as the supply and demand curve)
to show the equilibrium and disequilibrium in the current market. When drawing a supply
and demand curve, the price is generally placed on the y-axis, where as the quantity is
generally placed on the x-axis. The line representing supply would be the one having a
positive slope, where as the negative slope represents demand; usually, the two lines will
cross each other and intersect at a point, also known as the point of equilibrium. More
specifically, the term equilibrium refers to the state when there is an efficient distribution of
goods because the amount being supplied by the producers equals to the amount being
demanded by the consumers. [4] However, realistically, there can never be an equilibrium due
to the constant variation in demand and supply that happens daily. On the other hand,
disequilibrium is the state when suppliers try to make profit by producing more goods when
prices are high but those consuming the goods may find the product less attractive and thus
purchase lesser than usual; this produces an inefficient distribution of goods. [5]
Equally important to the supply and demand curve is the elasticity of demand.
Elasticity of demand is a calculation, not only used by economists but also for business
companies, in order to measure the changes in quantity demanded by the buyers when there is
a fluctuation in price. [4] This calculation is very important and can be easily done with a
simple formula:
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑
×
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑃𝑟𝑖𝑐𝑒
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
With the help of this formula, economists and businessmen will be able to find out whether
they should or should not reset the price of their products at a given time. A tip to the formula
is that if the value of the product is smaller than 1, then the demand is considered to be
inelastic, meaning that a small change in price will not create a big effect on the quantity
demanded by the buyers. A demand will be inelastic if the good is either necessary, have no
substitutes, or doesn’t cost a lot. On the other hand, if the value of the product is greater than
Jirasirikul, Tumvijin, Shang Kuan 4
1, then the demand is referred as being elastic, meaning that a small change in price will
cause a great change in the quantity demanded. An important thing to note is that high price
elasticity always indicates a very high sensitivity among consumers when faced with price
changes; the higher the elasticity, the higher the sensitivity. Demand can become elastic
because the good is either not necessary, have substitutes, or costs a lot. Lastly, the third case
is when the value equals exactly 1, or so called - unitary elastic. In this case, small changes in
price will not affect the total revenue, or the total income. [6] To further illustrate what is
meant by the formula, it is important to always remember that the numbers gained from the
use of the formula above represents the sensitivity of demand to the change in price, or the
amount of change in demand per unit of price change. Now imagine a situation when the
formula above gives a product with a value of 4; what could this possibly mean? It means
that for every percent of price increase, there would be a 4% decrease in the demand, or in
other words, 4% of the customers would turn away from the product, due to the lack of
interest.
It also means that for every percent of price decrease, there would be a 4% increase
in the number of quantity demanded, or in other words, 4% of additional customers would be
attracted by the price.
Another important theory developed by Alfred Marshall is the concept of consumer and
producer surplus. Consumer surplus is the difference between the maximum price that
consumers are willing to pay for a good and the price that the consumers are actually paying
for. Similar to the consumer surplus, the producer surplus is the difference between the
minimum price that the producers are willing to sell and the price that they are actually
selling. Consumer and producer surplus can be calculated from the demand and supply curve.
To calculate consumer and producer surplus, one should imagine a triangle on the left side of
the supply and demand curve, created from the price axis, demand curve, and the supply
curve. In the case when there is no government involvement, the triangle can be split into two
smaller triangles with the line separating the two being the price at equilibrium. To calculate
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the consumer surplus, find the area of the triangle above the equilibrium price but below the
demand curve. Therefore, the producer surplus is the area of the triangle below the
equilibrium price, but higher than the supply curves. On the other hand, in the case when
there is government interference, one should consider price floor and price ceiling; price floor
transfers some consumer surplus to producer surplus where as the price ceiling transfers some
producer surplus to consumer surplus. To better understand this idea, imagine a rectangle in
the middle of the two triangles, further separating them; thus, the original big triangle is split
into three smaller triangles and one rectangle. Calculating the consumer surplus is easy job: it
is the area of the triangle above the rectangle. However, the producer surplus gets a little
more complicated, because it is now the area of the triangle under the rectangle plus the area
of the rectangle. One thing that should be kept in mind is that there would be a deadweight
loss, which is the lost of surplus from both the producers and consumers, when the
government is intervening. The amount of deadweight loss is the area of the triangle to the
right of the rectangle and it depends on the amount of intervention from the government. [7]
The world had not known many men as brilliant as Alfred Marshall, who was able to use
his knowledge and expertise in other fields of study to create such as success in the area of
economics. He made great, immense contributions to the modern economics, and gained
himself the Nobel Prize in economics in the year 1992. He had introduced several theories
during his lifetime, including the supply and demand curve, the elasticity of demand, and the
consumer and producer surplus, many of which are still used in current economics by modern
day economists. Marshall’s theories are one of the most fundamental basics of economics.
His theories are commonly taught first in economic lessons as the base for the later theories.
His theories usually involve the use of graphs and mathematical calculations to show the
relationship between different factors. However, since Marshall concentrated most of his
theories for the economy of a certain population, most of them are only useful to
microeconomics, and hardly any to macroeconomics. Nevertheless, despite the fact that most
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of his contributions are only useful to microeconomics, he is still regard as one of the greatest,
most marvelous, most extraordinary, most incredible, most remarkable, and the most
important economist that the world had ever seen.
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References
[1] Marshall, Alfred. Principles of Economics. Library of Economics and Liberty. Web.
2011-9-9. <http://www.econlib.org/library/Marshall/marP.html>
[2] Alfred Marshall (1842-1924). Economy Professor. Web. 2011-9-11.
<http://www.economyprofessor.com/theorists/alfredmarshall.php>
[3] Alfred Marshall Biography (1842 - 1924), Principles of Economics, margin, elasticity of
demand, partial equilibrim. Net Industries. Web. 2011-9-8.
<http://social.jrank.org/pages/2408/Alfred-Marshall.html>
[4] Alfred Marshall (1842 – 1924). Library of Economics and Liberty. Web. 2011-9-11.
<http://www.econlib.org/library/Enc/bios/Marshall.html>
[5] Economics Basics: Demand and Supply. Investopedia. Web. 2011-9-10.
<http://www.investopedia.com/university/economics/economics3.asp#axzz1aCmzWavo>
[6] Price Elasticity of Demand. NetMBA Business Knowledge Center. 2002-2010. Web.
2011-9-10. <http://www.netmba.com/econ/micro/demand/elasticity/price/>
[7] How to Calculate Consumer and Producer Surplus from a Graph. .docstoc. Web.
2011-9-11.
<http://www.docstoc.com/docs/33844139/How-to-Calculate-Consumer-and-Producer-Sur
plus-from-a>