Alfred Marshall Economics Theories and Definition
Alfred Marshall was the son of a Bank of England cashier. Like Bentham and Mills, Marshall had to work hard at his studies under the influence of a very demanding father. In fact, Marshall had to make a promise not to play chess because it was considered by his father to be a waste of time. Interestingly, Alfred's father chose the ministry for his son's career and tried to ban mathematics from his life because it was irrelevant for this career. Later in his youth, Alfred Marshall rejected the ministry and the study of dead languages and devoted himself to mathematics, physics, and later to economics at Cambridge. He was very critical of his own writing and through much of his work into the wastebasket, and although he was an expert mathematician, he was skeptical of the value of mathematics for use in economic analysis (Marshall, 1925).
As a mathematician/economist at Cambridge University, Alfred Marshall wrote Principles of Economics (1890). His book replaced Mill's text as the dominant economics text in English. Marshall went beyond Jevons, Menger, and Walras to rigorously derive contemporary neoclassical conclusions of demand theory from the notion of diminishing marginal utility. Marshall was most noted for his work with partial equilibrium analysis and is considered to be the founder of standard microeconomics. Results of his work included deduction of a negative demand curve and definitions of price elasticity of demand and consumer surplus.
One of his most important contributions to utilitarian economics was to extend the idea of substitutability in the realm of the consumer for maximizing utility to the realm of the firm—the idea "of non-fixed factors of production. Here, just as a consumer would substitute one commodity for another or make marginal adjustments of quantities in order to maximize utility, a firm could also substitute one factor for another in order to try to reduce costs and to maximize revenue.
Ignoring imperfect competition (such a monopoly power), Marshall showed that prices were determined by the total supply and demand of the entire industry. As such, firms took prices as given and adjusted their output and costs to maximize profits.
Marshall suggested that there were three time periods for which to conduct economic analysis: (1) the market period where supplies were fixed, (2) a short period where capital was fixed, but where supply could adjust by changing input of labor or quantity of workers, and (3) a long period where supply could adjust by changing either labor or capital. Marshall's partial equilibrium analysis took place in the short period where capital remained fixed and expansion of production only occurred by changing the number of workers. Since there was a diminishing return to labor (a variable factor of production), maximum efficiency for production was achieved when the number of laborers that were employed was maximized based on factory design. A firm maximized profit in the short period by producing a level of output at the point where the price equaled its rising marginal cost. If production costs for the firm were lower than the industry average, then "quasi-rents" were available. In the long period, however, when all productive factors (i.e. both labor and capital) could be varied, competition had the major effect of equalizing the rates of profit for all firms, to minimize costs of production, and to provide the consumer the lowest possible prices.