Carl Menger Partial Equilibrium Theory

Carl Menger (1840-1921) — Partial Equilibrium, Menger Economics

What İs Partial Equilibrium Theory And Model

Menger was the father of the Austrian school of economics and published Principles of Economics in 1871. He was a professor at the University of Vienna located in Austria. Interestingly, in the last three decades of his life he published very little because he was never satisfied with his work and left volumes of fragmentary manuscripts at his death.

Unlike Jevons, Menger rejected use of mathematical equations and merely expressed his theories verbally with the help of numerical tables and examples. He was most noted for further development of the concept of marginal equilibrium analysis and for his price determination theory.

Keeping unit prices equal, Menger believed that the equilibrium at which an individual maximized his utility was attained when an individual equated the marginal utility derived from any one commodity to the marginal utility derived from each of the other commodities he consumed (i.e. MUX = MUy). According to Menger, value was derived from utility, and supply and demand hence utility (marginal) was the ultimate determinant of prices. If a price of a commodity was greater than a consumer's marginal utility, then the consumer would not buy. From this theory, Menger came up with a "Law of Demand" which basically stated that the quantity of a commodity that people were willing to purchase depended on the price of the commodity and that the quantity demanded and the corresponding price were inversely related to each other.

According to Menger, there were two types of goods: consumption goods or goods of first order and factors of production or goods of higher order. Since a variety of higher goods were necessary to produce lower ordered goods, capital and land were just as important and necessary to production as was labor. Therefore, in refute of the labor theory of value, Menger showed that the prices paid to each individual's input merely reflected the amount of each input's productive contribution and that capital and land were important contributor's. Hence, there was no surplus for any person or class to expropriate.

In agreement with Senior, Menger argued that pure science should be value free consisting of a description and understanding of actual reality and not the reality as one wished it to be. However, Menger contradicted his beliefs by attempting to put the laws of private property and distribution of income above theoretical or moral dispute as he held that they were natural, eternal laws -above moral questioning. A second methodological principle that Menger introduced was the assertion that economists could scientifically understand only individual households or business firms and not national economies.