The British Alfred Marshall (1842-1924) was a prominent economist considered to be the founder of the neoclassical school. A versatile man, he developed his career as a teacher, addressing disciplines such as Economics, Philosophy and Mathematics.
Trained at Merchant Taylor’s School and Saint John’s College, Marshall ended up developing his professional career as a teacher. In his time as a professor, he went through such prestigious universities as Saint John’s College, University College of Bristol, the University of Cambridge and the University of Oxford.
He began studying an area of knowledge such as Ethics, which was framed in the field of Philosophy. However, Marshall would end up making the leap to economics, becoming a leading economist. In fact, his work had an enormous influence on his time, having among his students Arthur Pigou and John Maynard Keynes, who, in the end, would also be famous economists.
Regarding his influences, it is worth noting that he was inspired by economists such as David Ricardo and John Stuart Mill, ideas that he also complemented with the works of the marginalists Leon Walras and Carl Menger.
It should not be forgotten that Marshall is at the origin of the so-called “welfare economy”. And it is that, Marshall firmly believed that the great purpose of the economy was to end poverty.
Alfred Marshall and price formation
The main object of study of the neoclassicals was the way in which prices were determined. Marshall stated that in order to understand the functioning of the market system, it was necessary to analyze the behavior of producers and consumers.
Thus, Alfred Marshall viewed demand as a table showing the relationships between price and quantity. However, for purchases to increase, a decrease in prices was necessary.
For their part, consumers had to choose between various goods and try to maximize their utility. In other words, consumers have to spend in such a way that they cannot increase their satisfaction with other possible combinations of goods.
However, demand alone does not explain the formation of prices. It is here, according to Alfred Marshall, the offer came into play. For entrepreneurs, as production increased, costs increased.
Entrepreneurs, trying to get the maximum profit, will fight to reduce costs. Therefore, they will seek to obtain the combinations of factors at the lowest cost to obtain a desired level of production.
We can conclude that, according to Alfred Marshall, demand was determined by marginal utility and supply was determined by production costs.
The study of elasticity
A fundamental concept in economics that we owe to Marshall is elasticity. Thanks to the study of elasticity, it is possible to know how a variation in prices can affect the quantity demanded. In this case, we would be facing what is known as the price elasticity of demand.
In the study of elasticity, Marshall would include the condition “ceteris paribus”, which means that, if one variable changes, the others will remain constant.
On the other hand, the cross elasticity of demand can also be studied. In other words, it is possible to know how the variation in the price of one good influences the quantity demanded of another good.
Finally, the demand-income elasticity, allowed to know to what extent changes in income affect the quantity demanded of a certain good.
Other contributions to the economy
Marshall also brought new terms to economics, complementary goods and substitute goods. In this way, complementary goods are those that are used together to meet a need. On the contrary, substitute goods are those that can replace another good in order to cover the same need.
Consumer surplus deserves special attention, which is the difference between the total utility that we obtain from a good or service and its market price.
As regards the factors of production, traditionally they were considered to be three: land, labor and capital, but Marshall added the so-called "entrepreneurial initiative", which is responsible for coordinating, organizing and promoting the previous three. In other words, without entrepreneurship there can be no economic activity.
Marshall's method for the study of economics
Marshall viewed Mathematics as an economic language. Moreover, Mathematics should be used as a tool that would allow solving the questions posed by the Economy.
Likewise, he defended that the economic texts be written and translated into the English language.
Finally, looking for a more practical economy that would respond to the problems of society, he argued that research in economics should be accompanied by examples that took place in the real world.