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1、 Chapter11 TheNeoclassicalSchool AlfredMarshall MARSHALL SLIFEANDMETHODUTILITYANDDEMANDSUPPLYEQUILIBRIUMPRICEANDQUANTITYDISTRIBUTIONOFINCOMEINCREASINGANDDECREASINGCOSTINDUSTRIES 1 MARSHALL SLIFEANDMETHOD Marshallwasthegreatsynthesizer seekingtocombinethebestofclassicaleconomicswithmarginalistthinkin
2、g henceproducing neoclassical economics Marshalldefinedhissubjectasfollows PoliticalEconomyorEconomicsisastudyofmankindintheordinarybusinessoflife itexaminesthatpartofindividualandsocialactionwhichismostcloselyconnectedwiththeattainmentandwiththeuseofthematerialrequisitesofwellbeing MarginalUtilityR
3、ationalConsumerChoiceLawofDemandConsumer sSurplusElasticityofDemand 2 UTILITYANDDEMAND AccordingtoMarshall demandisbasedonthelawofdiminishingmarginalutility Therearetwoimportantqualificationsatthispoint First hewasconcernedwithamomentintime whichistooshortanintervaltoconsideranychangesincharacterand
4、tastesofaparticularperson Secondqualificationofthelawofdiminishingmarginalutilityconcernsconsumergoodsthatareindivisible MarginalUtility TheutilityapproachoftheMarshalliansystemdealtwithpleasuresandpains desiresandaspirations andincentivestoaction Howcanwemeasuretheutilityofsuchintangibles Marshallb
5、oldlysaid withmoney Theprecisemoneymeasurementofpreferencesormotivesinbusinesslifemakeseconomicsthemostexactofthesocialsciences Twopeoplewithequalincomeswillnotnecessarilyderiveequalbenefitfromitsuse Take1poundordollarfromeachofthem andtheintensitiesofthesatisfactiongivenupmaynotbeequalatall Rationa
6、lConsumerChoice Marshalldemandanalysisalsoemployedtheideaofrationalconsumerchoice Inamoneyeconomy eachlineofexpenditurewillbepushedtothepointatwhichthemarginalutilityofadollar sworthofgoodswillbethesameasinanyotherdirectionofspending Onecanconstantlywatchtoseewhetherthereisanythingheisspendingsomuch
7、thathewouldgainbytakingalittleawayfromthatlineofexpenditureandputtingitonsomeotherline Marshallsuccessfullytiedthisequimarginalruledirectlytothecontemporarylawofdemand LawofDemand Marshall slawofdemandfollowsdirectlyfromhisnotionsofdiminishingmarginalutilityandrationalconsumerchoice Supposethatacons
8、umer sexpendituresareinequilibriumsuchthatthelastdollarspentoneachofseveralproductsyieldsidenticalmarginalutility thatis supposethatMUx Px MUy Py MUn Pn then ifthepriceofproductXfallswhilethepricesoftheothergoodsremainconstanttherationalconsumerwouldbuymoreofproductX WHY thepriceofX MUx Px MU P fort
9、heothergoods torestoreabalanceofexpenditurestheconsumerwillsubstitutmoreofXforlessofY Z MUx andMU P fortheothergoods thenowlowerMUx thenowlowerPx MUy Py MUz Pz Thus equilibriumwillberestored Theamountdemandedincreaseswithafallinprice anddiminisheswithariseinprice Consumer sSurplus Marshallassertedth
10、atthetotalutilityofagoodisthesumofthesuccessivemarginalutilitiesofeachaddedunit Table11 1Marshall sIdeaofConsumer sSurplus Howtocalculatetheconsumer ssurplus ElasticityofDemand Theonlyuniversallawpertainingtoaperson sdesireformoreofacommodity Marshallsaid isthat otherthingsbeingequal itdiminisheswit
11、heveryincreaseinhissupplyofthatcommodity Ed thepercentagechangeinquantity thepercentagechangeinpriceEd 1 demandiselastic Ed 1 demandisinelastic Ed 1 demandisunitelastic Thedeterminantsoftheelasticityofdemand Elasticityofmarketdemandtendstobegreatwhenagoodhasahighpricerelativetothesizeofthebuyers inc
12、omes Marshallsaidthataloweringofthepriceresultsinmanymorebuyersbeingabletoaffordtheproduct Ontheotherhand whenthepriceofaproductislowrelativetopeople sincomes asimilarpercentagechangeinpricewillnotresultinmuchofanincreaseinpurchases Marshallalsonotedthatthedemandforaparticularproductwilltendtobemore
13、elasticthemoreitcanserveasasubstituteforothergoods ImmediatePresentShortRunLongRun 3 SUPPLY ImmediatePresent Marketpricesrefertothepresent withnotimeallowedforadaptationofthequantitysuppliedtochangesindemand Ifagoodisperishable andifweassumethattheselleristryingtomaximizeprofitsorminimizelosses them
14、arketsupplycurveisperfectlyinelastic averticalstraightline Ifthegoodisnotperishable thesellershavereservationpricesbelowwhichtheywillnotsell Themarketsupplycurve therefore slopesupwardandtotherightuntilitencompassesthetotalquantityonthemarket Thenitbecomesvertical ShortRun ToanalyzetheperiodthatMars
15、hallreferredtoastheshortrun hedividedcostsintotwotypes whichhecalledsupplementarycosts fixedcosts andprimecosts variablecosts Infact theshortrunisdefinedasthatperiodduringwhichthevariableinputscanbeincreasedordecreased butthefixedplantcostscannotbechanged Variablecosts Marshall sprimecosts includeth
16、oseforlaborandrawmaterialsthatchangeovertheshortrunaccordingtochanginglevelsofoutput Intheshortrun allvariablecostsmustbecovered butsomeofthefixedcostsneednotbe Intheshortrun thefirm ssupplycurveisbasedonvariablecosts Theshort runsupplycurveslopesupwardandtotheright thehighertheproductprice thelargeristhequantitysupplied Moderneconomicsviewstheshort runsupplycurveasamarginalcostcurve LongRun Inthelongrun allcostsarevariable andtheymustallbecoveredifthefirmistocontinueinbusiness Ifthepricerisessu