Marginalism and neo classical School

UNIT-III

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Carl Menger(1840-1921)

• Carl menger was the founder of Austrian School.
• He was in civil service in brief period
• He became a professor of political economy at the university of vienna
• He published his books ``Principles of Economics’’in the same year1871.
• Mengers’s book established ``Marginal revolution’’of the Austrian school.

• According to Eric Roll,``Menger’s contributions to economics fall into three main classes :

i)Method

ii)Money

iii)Pure theory

i)Method

Menger advocated deductive method in economic analysis.The debate was called the ``Battle of methods’’.

In a phamplet called`Errors of Historicism”

Menger wrote ,``The Historians have stopped upon the territory of our science like foreign conquerors.

menger argued that without understanding the behaviour of individuals,we can never understand the total economic process.

Jevons approach is an automistic approach.

Jevons developed his theory on the basis of hedonism.

ii)Money

After describing the inconveniences of barter ,menger explains how money acts as a universal medium of exchange.

the values of goods can be expressed through money.

Money acts as a price.

menger made many important suggestions for implementing Austrian currency reform.

• iii)Pure theory (or) theory of value

its last contribution of economic thought.

menger starts with wants and means.He defines utility in a relative sense.

• Classification of goods

menger classified goods on technical grounds into goods of 1^st order,2^nd order,3^rd and higher orders.

1^st order-immediate satisfaction .ex(Bread)

2^nd –ex(flour)-Production of 1^st order goods.

3^rd –Ex(Wheat)-production of goods 2^nd order.

• Menger further classified goods into:

i)Economic goods

ii)Non-economic goods

Neo-Classical Economics Alfred Marshall(1842-1924)

Introduction

Neo classical economics is a broad theory that focuses on supply and demand as the driving forces behind the production ,pricing and consumption of goods and services.

Alfred Marshall’s re-appraisal and restatement of economic ideas resulted in the establishment of neo-classical school.

• Alfred Marshall was the founder of neo classical school.
• He was born Clapham in 1842.
• His book ``principles of economics’’was published in 1890.Eigth edition came out in1920, and it reprinted 11 times.

It is divided into six books.

• Book-I

deals with preliminary survey.

• Book-II

examines some fundamental notions.

• Book-III

discusses wants and theire satisfaction.

• Book-IV

describes the factors of production

• Book-V

deals withdemand and supply and value.

• Book-VI

presents an analysis of national income and its distribution.

• Definition and laws

Marshall defined Economics as,``Political economy or economics is a study of mankind in the ordinary business of life;Thus it is on the one a study of wealth and on the other and more important side,a part of the study man.

• Marshall classified human activities into
• 1.activities that contribute to material welfare.
• 2.activities that do not contribute to material welfare.
• Wealth is only means welfare
• Primary importance to man
• Secondary importace to wealth

• Economic laws are the statements economic tendencies and are hypothetical.
• Marshall method

Marshall considered both induction and deduction as useful for economics.

He was the greater interpreter of method of partial equilibrium.

• 1.Wants and their satisfaction

Marshall fully analysed the characteristics of wants and distinguished between necessaries, comforts and luxuries.

1^st-Consumption

2^nd -production

• 2.Marshallian utility and demand

price of commodity determined not supply alone.

classical economists believed not demand alone

utility theorists believed both demand and supply curves.

3.Consumers surplus

4.Elasticity of demand

5.Supply and cost

6.Factors of production

7.Population

8.Division of labour

9.Laws of Returns

10.Internal and external economies

11.Marshallian theory of value and Time element

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Presented

BY

Dr.D.Hema

Assistant Professor of Economics