2. The marginal Revolution
• The marginal revolution took place in the
latter half of nineteenth century. The
marginalist school developed in many
countries at the same time.
• The term marginal Revolution is applied to the
writings of the above economist because they
made fundamental changes in the apparatus
of economic analysis.
3. • And they started looking at some of the important
economic problems from altogether new angle
different from the classical economist.
• Marginal economist has been used to analyze the
single firm and its behavior, consumer behavior,
the market for a single product, and the formation
of individual prices.
• Marginalism dominates western economic thought
for nearly a century until it was challenged by
Keynesian attack in 1936.
• Keynesian economist however shifted the sphere of
enquiry from microeconomics to macroeconomics,
where the problem of the economy on the whole is
analyzed.
4. • So the leading early marginalist felt the need
for thoroughly revising the classical doctrines,
especially the theory of value.
• They thought by rejecting the labour theory of
value and by advocating the marginal theory of
value, they could strike at the theoretical basis
of socialism.
• Meaning of Marginal revolution and its
implication for the theory of Value
• The classical theory emphasized on supply,
production and cost. But the marginalist school
emphasizes on consumption, demand and
utility.
5. • Utility is key word of marginalist school.
• And they have used this concept to shift the
emphasis from supply to demand and from
cost to utility as the basis of value.
• The marginal analysis is regarded as an
innovation in the method of approach of
science.
• As has already be noted, the essential
elements of modern techniques, namely the
emphasis on demand and utility and the
recognition of marginal utility were adopted in
19th century.
• The utility approach is subjective approach.
6. • Value is the central problem in exchange. We can
consider the economic system as a number of
interdependent markets. Then the central problem
of economic enquiry becomes the explanation of
exchange processor ,explanation of formation of
price.
• The classical economist explains value in term of
labour. It was an objective theory.
• The marginal utility theory school takes
consumption as the starting point. The school
claims that its theory of value independent of any
social order.
• But as we have already noted , the classical theory
was not strong enough to withstand the attacks of
the growing working class movement.
7. • So the early marginalist abandoned the labour
theory of value together.
• There is another point which we have to
remember. Classical political economy was
developed more or less entirely by English
economist.
• Essential ideas of the Marginalist school.
• 1) The marginlaist school, concentrated on the
‘margin’ to explain economic phenomena.
According to this school, all economic
discussions are made at the point of margin. The
marginal utility school extended the marginal
principle to all economic doctrine
8. • We know that economist were in trouble for a long
time about the paradox of value. For instance,
water had great value in use but very low value in
exchange. On the other hand, diamonds which had
very low value in use had high exchange value.
• There explanation is presented by J.B.Say that air
and water are so use full that their value is infinite
and therefore we cannot buy them.
• On the other hand the marginal utility theory helps
us to explain this theory.
• Though the total utility of water is great its
marginal utility is very low. In the case of diamond
as the supply is small, marginal utility tend to very
high.
9. • As value depend on marginal utility, its command high
value in exchange.
• 2) The approach of the marginalist school is
microeconomics rather than the macroeconomics.
The marginalist school does not deal with the
aggregate economy. It deals with decision making of
individual buyers and sellers, price of single
commodity, the output of single firm and so on.
• In other words, it is concerned mainly with the
problem of partial equilibrium analysis.
• 3) The marginal school has adopted the abstract and
deductive method (deductive methods involve beginning with a
general concept or given rule and moving on to a more specific conclusion.)of
classical economist.
10. • 4) The marginal utility analysis is based on the
assumption of competition. There is larger buyer
and sellers who can influence the decision making
by their action.
• 5)while the classical economist consider the cost
of production, that is supply, as the determinant
of value, the marginalist school considered
demand to be important element in the
determination of value.
• 6) The analysis of marginal school is based on the
subjective and psychological approach.
11. • The marginalist approach is based on the
assumption of rational behavior on the part
on individuals.
• The marginalist assumes that man act in a
rational manner in balancing their pleasures
and pain and in measuring the marginal
utilities of different value.
• 8)the marginalist school believes that
economic forces generally tend towards
equilibrium.
• 9) Lastly the marginal school supported the
laissez fair policy of classical economist.
12. Alfred Marshall
(1842-1924)
• Alfred Marshall was the leader of the second
generation of marginal utility school.
• One great difference between the economist of the
earlier marginal utility school and the Marshall is
that the early economist of marginalist school
rejected the classical theory of value based on the
cost of production.
13. • Marshall made an attempt to bring about a
synthesis of the classical theory and the new
theory based on marginal utility.
• On account of this, Marshall is sometimes also
described as a leading neo- classical
economist.
14. • Marshall was born in a middle class family in
London in 1842.
• He was a son of cashier in the Bank of England.
• Marshall specialized in mathematics at Cambridge
and latter on studies economics.
• He was professor of Economics at Cambridge from
1885 to 1908.
• Marshall’s masterpiece “the principles of
economics”, appeared in 1890. His other important
works included “economics of Industry”, in 1879,
‘Money, credit and commerce’ in 1924
15. • Nature and scope of economics
• According to Marshall, “political economy is a
study of mankind in the ordinary business of
life, it examines that pat of individual and
social action which is most closely connected
with the attainment and with the use of
material requisites of well -being”.
• Marshall definition of economics is known as
the materialistic welfare definition of
economics.
• Marshall agreed with the view of Adam Smith
that economics studies about the wealth. But
it is only the part of the study.
16. • In his own words “thus it is on the one side a
study of wealth and on the other hand and more
important side a part of the study of man”.
• It may be interesting to note that Marshall
treatise (discussion) was the first to establish the
use of the term ‘Economics’ from 1890 in
England and United State.
• In the nineteenth century , the term commonly in
use was ‘Political economy’
• Economics Laws
• Marshall Regarded economics laws as statement
of tendencies.
• He was the aware of the fact that they were not
as exact as the law of Physics and Chemistry.
17. • Diagrammatic Approach
• Though Marshall was an expert in Mathematics, he
had his own doubt the value of mathematics in
economics.
• But he was in favour of using diagrams to illustrate
theories.
• In fact he translated many of the theorems of Mill and
Ricardo into diagrammatic language.
• Keynes described him as “founder of modern
diagrammatic economics’
• Marginal utility of Demand
• According to Marshall, demand is based on the law of
diminishing marginal utility.
• The law tells that the marginal utility of a thing
diminishes with every increase in the amount of the
person already has.
18. • We should remember that the law of diminishing
utility is based on the following assumptions.
• 1) it refers to given amount in a time
• 2) there are no changes in the habits and taste
• 3) all units of a good are homogeneous
• Marshall stated the general law of Demand as
follows.
• ‘the greater the amount to be sold, the small
must be the price at which it is offered in order
that it may find purchasers.
• Or in other words the amount demanded
increases with a fall in price, and diminishes
with a rise in price.’
19. • On the basis of diminishing utility, Marshall has
developed the law of substitution, known as the law
of equi marginal utility in consumption.
• The law tells that demand is based on the balancing
of marginal utilities.
• A consumer will spend his money on different things
in such a way that their marginal utilities are
proportionate to their prices.
• Marshall believed that the marginal utility of a good
could be measured in term of money.
• Consumer surplus
• Marshall has added the term consumer surplus to
economic literature.
20. • Consumer surplus measured the difference between
the potential price which a consumer is prepare to
pay and the actual price he pays.
• The concept of consumer’s surplus has been derived
from the law of diminishing marginal utility.
• Elasticity of Demand
• Marshall has introduced the concept of elasticity of
demand to explain the rate of change of demand.
• The rate at which demand may change when price
change is known as elasticity of demand.
• The law of demand tells us that when price fall,
demand increases.
• But it does not tell to what extent the demand will
change in price.
21. • The concept of elasticity of demand relates
the fall in price to the percentage increase in
quantity demand.
• The elasticity of demand at any price can be
measured by the percentage change in the
amount demanded divided by the percentage
change in the price.
Elasticity of demand=Percentage change in Qd
Percentage change in price
• The concept of elasticity of demand is very
useful in economics theory and practice.
• It is useful to studying the problem of value
under monopoly.
22. • The monopolist generally fixes a higher price
for commodities with inelastic demand rather
than those with elastic demand.
• Again the monopolist can practice the price
discrimination only with the elasticity of
demand is different in different market.
• The problem has also helpful in studying the
problem of taxation.
• Generally the govt. taxes those commodities
with inelastic demand at a higher rate than
those with elastic demand.
23. • Supply and cost of production
• According to Marshall, supply is governed by
cost of production.
• And cost of production is measured in terms
of money.
• But behind the monetary cost, there are the
real cost.
• Thus Marshall has distinguished between the
real cost of production and the expense of
production.
• Supply increases when price increases. in
other words supply curve upward slope.
24. • Marshallian theory of value and Time element
• For a long time, there was a controversy
regarding what determined the value of a
commodity.
• The classical economist said that the cost of
production determined value.
• But the economist of early marginalist school
promote demand, base on marginal utility.
• Marshallian theory of value combining both
demand and supply side.
• According to Marshall, the forces behind both
supply and demand determine the value.
25. • Behind demand is marginal utility. It is reflected
in the demand price of buyer i.e. at the price at
which given quantities are demanded.
• Behind supply is the real cost that is the marginal
efforts and sacrifice.
• It is reflected in the supply price of sellers that is,
the price at which the given quantities will be
supplied.
• Marshallian theory of value, owing to its
emphasis both on supply and demand as forces
of governing value, is also known as “Dual
theory of value’.
26. • The value is determined by the forces of
supply and demand at the margin.
• It is the marginal utility and marginal cost of
production that govern value.
• On the basis of time element, Marshall has
classified value in to four kinds.
• 1) market value
• 2) Short period value
• 3) long period value
• 4) Secular value
27. • The market price of a commodity may be defined
as the price ruling at a particular period.
• In the case of market price, the supply is fixed and
price mainly determined by demand.
• For example take the example of perishable
commodities.
• In the case of short period price, we may think
supply as the amount which can be produced at
the given price, with existing equipment and
labour.
28. • In other words the short is defined as the period in
which the variable inputs can be increased or
decreased, but the fixed plant cannot be changed
• In case of long period, supply means, what can be
produced by the plant which itself can be
remuneratively produced and applied within given
time.
• Marshall has conceived of gradual or secular
change in normal price. Secular changes in normal
value are caused by the changes in economic data:
population, taste, capital, and so on.
