Economic Thought

1. sabeshmanikandan@gmail.com
E6L01
Economic Thought

2. Muthusamy
Sabesh
Manikandan
Assistant Professor of Economics
Ayya Nadar Janaki Ammal College
Sivakasi
Email:
sabeshmanikandan@gmail.com
Download at:
www.anjaceconomics.blogspot.com
E6L01
Economic Thought

3. Economic Thought
To acquire knowledge on neo-classical and welfare economics
Unit IV: Neo-classical Economics & Welfare Economics
Alfred Marshall : Life Sketch and economic ideas : Utility and demand analysis
– consumer’s surplus – elasticity of demand – the concept of representative
firm – value – demand and supply – time element in the theory of value –
concept of quasi rent and economies of scale . Welfare Economics :
Meaning – genesis of welfare economics – difference between welfare
economics and positive economics. A.C. Pigou: Life Sketch and economic
ideas. J.R. Hicks : Life Sketch and economic ideas
Self – Study Portions

4. Agenda Style
Alfred Marshall1
Utility, Elasiticity of demand, Consumer, representative firm etc.,2
Welfare Economics: genisis3
A.C Pigou and J.R. Hicks4

5. Alfred Marshall
26 July 1842 – 13 July 1924
Principles of Economics (1890)
Arthur Cecil Pigou
18 November 1877 – 7 March 1959
The Economics of Welfare, 1920
Sir John Richard Hicks
8 April 1904 – 20 May 1989
Value and Capital (1939)
Economists

6. Alfred Marhall
Life sketch of Alfred Marshall

7. Alfred Marshall
Life Sketch
Born : 26 July 1842
London, England
Died : 13 July 1924
(aged 81)
Cambridge, England
Nationality: British
Father : William Marshall
Mother : Rebecca Oliver
Siblings : Charles William
Walter
Agnes
Mabel Louisa
Spouse : Mary Paley

8. Alfred Marshall
Life Sketch
Institution : St John's College,
Cambridge
University College,
Bristol Balliol
College, Oxford
School or :Neoclassical
Tradition Economics
Alma mater : St John's College,
Cambridge
Influences : Leon Walras
Vilfredo Pareto
Jules Dupuit
Stanley Jevons
Henry Sidgwick
Contributions
Founder of neo-classical
economics

9. 1902189018851868
moral sciences at
St. John’s
College,
Cambridge
Lecturer
Political Economy
at Cambridge
Professor
founded
British
Economics
Association
The British
Economics
Association latterly
called as Royal
Economics Society
Royal Economics
Society
Alfred Marshall’s career
Timeline: Alfred Marshall
1908
Prominent
Economist retired
from Cambridge
Retired

10. Selected contribution of Alfred Marshall
Contribution of Marshall
1879 1892 1919 1923

11. Economies of
Scale
Some of the major economic ideas of Alfred Marshall
Economic Ideas of Alfred Marshall
Definition & Laws of
Economics
Method
Wants and
Their
Satisfaction
Utility and
Demand
Consumer’s
Surplus
Representative FirmElasticity of Demand
Value
Demand and
Supply
Time element
in the Theory
of Value
Quasi Rent

12. Principles of Economics
1890
 Book I : Preliminary Survey
 Book II : Some Fundamental Notions
 Book III : Demand or Consumption (later it was re-
titled as "On Wants and Their Satisfaction")
 Book IV: Production or Supply (later it was re-titled
as "Agents of Production: Land, Labour,
Capital and Organization")
 Book V: The Theory of Equilibrium of Demand
and Supply (later it was re-titled as "General
Relations of Demand, Supply and Price")
 Book VI : The Distribution of the National
Income

13. “Political Economy or
Economics is a study of
mankind in the ordinary
business of life”
Definition and Laws of Economics

14. “utility is the wants
satisfying ability of a
good”
Utility

15. “the additional benefit which
a person derives from a
given increase of the stock of
a thing, diminishes with every
increase in the stock that he
already has”
Law of Diminishing Marginal Utility

16. “has to distribute his resources that
they have the same marginal utility in
each use; he has to weigh the loss that
would result from taking away a little
expenditure here, with the gain that
would result from adding a little there”
Equi-Marginal Utility

17. A rational consumer aims at maximizing
satisfaction from his consumption.
Demand Analysis
The amount of satisfaction is closely
related to the quantity of that
commodity consumed by the
consumer.
Thus demand is based on the law of
diminishing marginal utility

18. “The excess of price which he would
be willing to pay rather than go without
the thing, over that which he actually
does pay, is the economic measure of
this surplus satisfaction”
Consumer Surplus

19. “The elasticity of demand in a market
is great or small according as the
amount demanded increases much or
little for a given fall in price and
diminish much or little for a given rise
in price”
Elasticity of Demand

20. “the firms rise and fall but the
representative firm remains
always of the same size as does
the representative tree of virgin
forest”
Representative Firm

21. we might as reasonably dispute, whether it is the
upper or under blade of a pair of scissors that cuts a
piece of paper, as whether value is governed by
utility or cost of production. It is true that when one
blade is held still, and the cutting is effected by
moving the other, we may say with careless brevity
that cutting is done by the second; but the statement
is not strictly accurate, and is to be excused only so
long us it claims to be merely a popular and not a
strictly scientific account of what happens
Value

22. “Demand and Supply are
interdependent just like the
blades of a Scissor
One cannot cut without the
help of the other
Demand and Supply

23. 1) Market value
2) Short period value
3) Long period value
4) Secular value
Time element in the value theory

24. Quasi-rent is the income earned from
machines and other appliances for
production made by man.
The quasi-rent is the surplus earned by the
instruments of production other than land
Time element in the value theory

25. Internal economies: arise within a firm
when its production increases.
External economies: are external to a
firm and accrue to it when the size of
the industry expands
Economies of Scale

26. Genesis of
Welfare
Economics

27. 01
02
03
04
The welfare of an individual does not
depend on other individual’s welfare
Classical Economics
deals with economic aspects of the
development process in low-income
countries
Modern Development Economics
Social welfare (W) is the total of the
two individual utilities (U):
W = U1 + U2
Neo Classical Economics
The study of a country's well-being by
combining economists' and
psychologists' techniques
Happiness Economics
Short History of Welfare Economics
Welfare Economics
18th & 19th
Centuary
Since 1870 Since 1950 Since 2005

28. Welfare Economics
Welfare
Economics
Real
Income
Job
Satisfaction
Employment
Prospects
Leisure
Time
Environment /
air pollution
Happiness
Levels
Life
Expectancy
. Health
care
Education
Cost of
Living
Housing

29. Positive vs Welfare Economics
Positive Economic Welfare Economics
what it ‘is’ Verb what ‘ought’ be
body of systematised knowledge System body of systematised knowledge relating
to criteria of what ought to be
ascertainable facts Judgment valuations and obligations
establishment of uniformities Objective determination of the ideals
Utility based Measurability Value Judgment
Individual welfare Concern Social Welfare
Partial Equilibrium Equilibrium General Equilibrium
propositions, theories and laws Derive Determinants

30. Arthur Cecil Pigou
Life sketch of A C Pigou

31. Isle of Wight
Born : 18th November 1877
Ryde, England
Died : 7th March 1959
(aged 81)
Cambridge, England
Nationality: Britain
Father : Clarence George
Scott Pigou
Mother : Nora Frances
Sophia
Siblings : Gerard Clarence
(1878)
Kathleen Marie
(1881)

32. Arthur Cecil Pigou
Life Sketch
Institution : Harrow,
Kings College
Cambridge
School or : Neoclassical
Tradition Economics
Alma mater : St John's College,
Cambridge
Influences : Marshall
Contributions
Welfare Economics
Externalities
Pigou Effect
Pigouvian Tax

33. 1900189918961895
Clayton
Scholarship for
Modern Studies
Harrow School
Student at
Cambridge
King’s College
obtaining a ‘first’
in the undivided
Historical Tripos
Bachelor of Arts
Moral Sciences
Tripos
Part II
Student Life of A C Pigou
Timeline: Arthur Cecil Pigou

34. Chancellor’s Award (1899)
Alfred the Great
A Poem which obtained the Chanceller's Medal,
at the Cambridge Commencement
Burney Prize (1900)
Robert Browning as a Religious Teacher
a prize awarded to the best essay submitted
dealing with the philosophy of religion
Cobden Prize (1901)
The Causes and Effects of Change in the Relative Values
of Agricultural Produce in the United Kingdom during the
last Fifty Years
awarded the Cobden Prize
Awards

35. 1943190819021901
began lecturing
on economics
Lecturer
became a Fellow
of King's College
on his second
attempt
King’s College
elected as
Professor of
Political Economy
Professor
held the post until
1943
Retirement
AC Pigou Career
Timeline: Arthur Cecil Pigou

36. Selected contribution of A C Pigou
Contribution of A C Pigou
1905 1920 1933 1949

37. Contribution of A C Pigou
1917 - Value of money
1920 - A Capital Levy and a Levy on War Wealth
1921 - The Political Economy of War
1927 - Industrial Fluctuations
1928 - A Study in Public Finance
1933 - The Theory of Unemployment
1946 - Income
1949 - The Veil of Money
1952 - Essays in Economics

38. Social welfare is regarded as the
summation of all individual welfares
in a society
Social Welfare
the quality of work, one’s
environment, human relationships,
status, housing, and public security
Absentee
individual’s desires are met.
Welfare
economic welfare is by no means an
index of total welfare.
Economic Welfare
A. C. Pigou’s Welfare Economics: Concepts
Welfare Economics

39. Welfare Economics
“If a man marries his housekeeper or his cook,
the national dividend is diminished”.
“that part of social
(general) welfare that can
be brought directly or
indirectly into relation with
the measuring rod of
money”

40. Welfare Economics
“If a man marries his housekeeper or his cook,
the national dividend is diminished”.
“people now rich are
different in kind from the
people now poor having in
their fundamental nature
greater capacities for
enjoyment”

41. Welfare Economics
Economic welfare and National income as
coordinate
 Social Welfare
 Marginal Private Cost
 Marginal Social Cost (MPC+tax)
Market equilibrium = Social Equilibrium

42. Welfare Economics
Economic welfare and National income as
coordinate
 an increase in national income
represents an increase in welfare
 the distribution of national income is
equally important
 transfers of income from the rich to
the poor will increase social welfare
 economic equality that maximises
welfare

43. John Richard Hicks
Life sketch of J R Hicks

44. Born : 8th April 1904
Warwick, England
Died : 20th May 1989
(aged 85)
Blockley, UK
Nationality: Britain
Father : Edward Hicks
Mother : Dorothy Catherine
(Stephens)
Spouse : Ursula Kathleen
Webb Hicks
Institution : Gonville & Caius
College, Cambridge
London School of
Economics
University of Manchester
Nuffield College, Oxford
John Richard Hicks
1904 – 1989

45. School or : Neo-Keynesian
Tradition Economics
Alma mater : Balliol College
Influences : Keynes
Hayek
More
Contributions
IS/LM model
Capital theory
Consumer theory
General Equilibrium
Theory
Welfare theory
Induced innovation
John Richard Hicks
1904 – 1989

46. 1935192319221917
Enrolled at Clifton
College.
Schooling
Joined Balliol
College, Oxford
Balliol College
Decided to
pursue
Economics
Professor
Married Ursula
Webb & he became
a fellow of Gonville
& Caius College and
lectured at
Cambridge
Academic &
personal
J R Hicks Career
Timeline: John Richard Hicks
1935
The University of
Manchester
Professor

47. 1954194819461942
Became a ‘fellow’
at the British
Academy.
Fellow
Returned to
Oxford and joined
Nuffield College
as a research
fellow
Research Fellow
Became a foreign
member of the
Royal Swedish
Academy.
Foreign Member
member of Revenue
Allocation
Commission in
Nigeria
Revenue
Allocation
commission
J R Hicks
Timeline: John Richard Hicks
1958
Became a member
of American
Academy.
American
Academy

48. 1972197119641960
the Royal
Economic Society
President Knighted.
joined All Souls
College as a
research scholar.
Research
Scholar
Received the Nobel
Prize in economic
sciences along with
Kenneth Arrow.
Nobel Prize
J R Hicks
Timeline: John Richard Hicks

49. Selected contribution of A C Pigou
Contribution of J R Hicks
1932 1939 1956 1967

50. Contribution of J R Hicks
1931 Theory of Uncertainty and profit
1932 The Theory of Wages
1935 The Theory of Monopoly
1939 Value and Capital : An inquiry into some fundamental principles of economic theory
1941 Taxation and War Wealth
1941 The Rehabilitation of Consumers' Surplus
1941 Saving and the Rate of Interest in War-Time
1941 Education in Economics
1942 Consumers' Surplus and Index-Numbers
1947 World Recovery After War

51. Contribution of J R Hicks
1958 The Measurement of Real Income
1959 Essays in World Economics
1960 Linear Theory
1962 Liquidity
1965 Capital and Growth
1966 Growth and Anti-Growth
1967 Critical Essays in Monetary Theory
1969 A Theory of Economic History
1976 &
1977
Economic Perspectives
1989 A Market Theory of Money

52. Top eleven economic ideas
Economic Ideas of Sir John Hicks
Definition of
Economics
Consumer
Equilibrium
Revision of
Demand
Theory
Consumer’s
Surplus
Population
General Equilibrium
Right Man on the
Right Job
Economic Dynamics
Stationary State
Theory of
Trade
Cycle
Welfare
Economics

53. The Sveriges Riksbank Prize in
Economic Sciences
Memory of Alfred Nobel
1972
General Equiblirium Theory

54. “the science which
deals with business
affairs”
Definition of Economics

55. the change in the
consumption of goods
caused by a change in
income, whether
income goes up or
down.
Income Effect
consumers will replace
more expensive items
with less costly
alternatives
Substitution Effect
Consumer Equilibrium

56. He used ordinal utility theory but he
rejected indifference curve technique for
two reasons
1. IC deals with only two commodity
2. IC is based on assumption of continuity
Revision of Demand Theory

57. Indifference curves technique does
not make the assumption of cardinal
measurability of utility, nor does it
assume that marginal utility of money
remains constant.
Consumer’s Surplus

58. the over population of particular areas can
easily be remedied by industrialization
for meeting the needs of food, clothing etc. of
an increasing population, the production
should also be simultaneously increased.
Population

59. Although the method of incentives is
better than the method of compulsion,
the latter can prove to be more fruitful
if it is followed by an adequate system
of selection
Right Man on the Right Job

60. general equilibrium is chiefly
concerned with the problem of
general equilibrium under conditions
of perfect competition
General Equilibrium

61. “when” the problem try to create a
relationship between the variation in time, the
quantity of factors and the goods produced
and also the way these changes in dates
have affected the relationship between
factors and products.
Economic Dynamics

62. In such a state, tastes, techniques
and resources remain stationary over
a given period of time
Stationary State

63. The theory by making use of the
accelerator—multiplier interaction principle
and autonomous and induced investment.
an, “ingenious piece of work” and “the first coherent
theory of the cycle to appear in some years
- Dussenberry
Theory of Trade Cycle

64. The compensation principle is
generally known as new welfare
economics
Welfare Economics

65. If A is made so much better off by
change that he could compensate B
for his loss and — still have
something left for, then the
reorganization is unequivocal
improvement
compensation principle

66. Thank you
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