Alfred Marshall was a pioneering British economist who made major contributions to demand theory, production theory, and supply theory in his influential book Principles of Economics. Some of his key contributions included: (1) clearly formulating the concept of price elasticity of demand, (2) conceiving of production occurring over multiple time periods from short to long run, (3) distinguishing between fixed and variable costs of production, and (4) analyzing how internal and external economies of scale impact firm and industry costs and supply curves in the long run. Marshall viewed economics as a science of human behavior that examined how individuals and societies attain material well-being.

1. Alfred Marshall
July 26, 1842 – July 13, 1924

2. Alfred Marshall
• Born in London
• The second son of William Marshall, a clerk at the Bank
of England, and Rebecca Marshall, née Oliver.
• Published “Economics of Industry” with his wife Mary Paley
• In 50 years of writting he produced 82 publications including:
o 9 editions of Principle of Economics
o 5 editions of Industry and Trade
o 2 editions of The Economics of Industry
o Money, Credit and Commerce appearing in 1923 (year before his death)
only appeared in one edition

3. Alfred Marshall
Principles of Economics
• In defining Economics, Marshall stated:
 “Political economy or economics is the study of mankind
in the ordinary business of life; it examines that part of
individual and social action which is most closely
connected with the attainment and use of the material
requisites of well-being.”
• To Marshall, economics was a science of human behavior.
• The aim of the Principles is to study the economic aspects of human
behavior in order to derive the laws governing the functioning of the
economic system.

4. Alfred Marshall
Theory of Demand
Utility and Demand
• Controversy over whether cost of production (classical)or utility
(marginal utility school of Jevons, Menger and Walras ) determines
price.
• Marshall believed that influence of time and awareness of the
independence of economic variables would resolve the question.
• Demand curve for final goods slopes downward and to the right and
individuals will buy larger quantities at lower prices.

5. Alfred Marshall
Theory of Demand
Demand Schedules and Curves
• Supply curve depends on the time period under analysis.
• The shorter the period, the more important the role of demand in
determining price.
• The longer the period, the more important the role of supply. In LR in
constant costs exist so that supply is perfectly elastic, price will depend
solely on cost of production

6. Alfred Marshall
Theory of Demand
• Alfred Marshall’s most important contribution to demand theory was
his clear formulation of the concept of price elasticity of demand.
 Price and quantity demanded are inversely related to each
other; demand curves slope down and to the right.
 Degree of relationship is shown by the coefficient of price
elasticity: (on the next slide)
Price Elasticity of Demand

7. Alfred Marshall
Theory of Demand
Price Elasticity of Demand
Elasticity of Demand
eD = percent change in quantity demanded = -q / 
percent change in price q p
• Coefficient is negative b/c of inverse relationship; by convention the
coefficient is shown as positive by adding the negative sign to the right
side of the equation.
• If price decreases by 1 percent and quantity demanded increases by 1
percent, total revenue is unchanged, and the coefficient value is 1. The
commodity is said to be price elastic..

8. Alfred Marshall
Theory of Demand
Price Elasticity of Demand
• If price decreases by a given percentage and the quantity demanded
increases by a smaller percentage, total revenue decreases and the
coefficient < 1. The commodity is price inelastic
• Marshall also applied the elasticity concept to the supply side.
• Marshall was 1st to express the concept of elasticity with mathematical
precision and is considered its discoverer.

9. Alfred Marshall
Theory of Production
• Marshall conceived of four different periods of production.
1. Market period - Very short period in which supply is fixed
(perfectly inelastic). No reflex action of price on quantity supplied
2. Short run - A period in which the firm can change production and
supply but cannot change plant size. Higher prices cause larger
quantities to be supplied (upward sloping supply curve).

10. Alfred Marshall
Theory of Production
3. Long run - Plant size can vary and all costs become variable.
 Supply curve becomes more elastic because of firms
adjustment in plant size and can take 3 forms:
 Increasing costs - slopes up and to the right
 Constant costs - perfectly elastic (horizontal)
 Decreasing costs - slopes down and to the right
(unusual situations)
4. Secular period - (Very long run) Permits technology and
population to vary

11. Alfred Marshall
Costs of Production and Supply
Laws of Return in the Long Run
• Two components of total costs of the firm:
 Prime costs - costs that vary with output (also called special or
direct costs)
 Supplementary costs - costs that do not vary with output (fixed
costs)

12. Alfred Marshall
Marshall on Supply
Consumers’ Surplus
• the difference between the total expenditures consumers would be
willing to pay and what they actually pay.
MU
Quantity
Demand
Consumer Surpluss

13. Alfred Marshall
Marshall on Supply
• Most important contribution to theory of supply was his concept of
the time period, particularly the short run and the long run.
 Spoiling the market - selling at low prices today and preventing
the rise of market prices tomorrow, or selling at prices that
incur resentment of other firms in the industry.
 True cost curve for SR is not marginal cost curve but a supply
curve to the left of the marginal cost curve (here, Marshall
dropped the assumption of perfect competition).

14. Alfred Marshall
Marshall on Supply
• LR forces that determine the shape and position of firm’s cost and supply
curves:
 Internal forces - as the size of firm increases, internal economies of
scale lead to decreasing costs and internal diseconomies result in
increasing costs.
 External forces - external economies (not clear whether to firm or
industry) result in downward shift of firm and industry cost and
supply curves as industry develops.
- Major causes of external economies are the
reductions in costs that take place for all firms in an industry when all
firms locate together and share ideas and attract subsidiary industries
and skilled labor to the area.

15. Alfred Marshall
Stable and Unstable Equilibrium
• Stable equilibrium is achieved when any displacement from
equilibrium will produce forces returning the market to
equilibrium
• Unstable equilibrium is possible when supply curve in
downward sloping. If price or quantity attain equilibrium
values, they will remain there, by if system is disturbed it
will not return to these equilibrium values.

16. Economics is not a
body of concrete
truths, but an
“engine for the
discover of concrete
truth.”

17. http://policonomics.com/lp-neoclassical-economics-alfred-
marshall/
http://www.encyclopedia.com/people/social-sciences-and-
law/economics-biographies/alfred-marshall
https://en.wikipedia.org/wiki/Alfred_Marshall
References