Marginalists and Neoclassical Economics (L4)* Flashcards
Describe the role of marginal utility in determining consumer choices. How does the law of diminishing marginal utility influence demand curves?
Answer:
Marginal Utility: The additional satisfaction from consuming one more unit of a good or service.
Law of Diminishing Marginal Utility: As more of a good is consumed, the extra satisfaction from each additional unit decreases.
Impact on Demand:
Consumers are willing to pay less for each additional unit, creating a downward-sloping demand curve.
Explain the concept of marginal productivity. How does it determine the distribution of income among factors of production?
Answer:
Marginal Productivity: The additional output from using one more unit of a factor (e.g., labor or capital).
Wages: Determined by the marginal productivity of labor.
Rents: Based on the productivity of land.
Profits: Reflect the marginal productivity of capital.
Distribution of Income: Each factor is paid according to its contribution to total output.
What is general equilibrium theory? How did Léon Walras contribute to its development?
Answer:
General Equilibrium Theory: Explains how supply and demand interact across all markets simultaneously to achieve equilibrium.
Walras’ Contribution:
Introduced mathematical models showing that all markets are interdependent.
Developed Walras’ Law: If all but one market are in equilibrium, the remaining market will also be in equilibrium.
Discuss the significance of elasticity in economic analysis. How do different types of elasticity impact pricing decisions?
Answer:
Elasticity: Measures responsiveness of quantity demanded or supplied to changes in price or other factors.
* High Elasticity: Small price changes significantly affect demand; producers avoid price increases.
* Low Elasticity: Demand remains stable despite price changes, allowing higher pricing power.
Types:
Price Elasticity of Demand: Impacts revenue; elastic goods require cautious pricing.
Income Elasticity: Differentiates between normal and luxury goods.
Cross-Price Elasticity: Shows relationships between substitutes and complements.
What is the difference between partial equilibrium analysis and general equilibrium analysis? Provide examples.
Answer:
Partial Equilibrium: Examines one market at a time, assuming others remain constant.
Example: Analyzing the effect of price changes in the labor market only.
General Equilibrium: Considers how changes in one market affect all others.
Example: Walras’ model integrating goods and input markets.
Explain consumer and producer surplus. How do they relate to market efficiency?
Answer:
Consumer Surplus: The difference between what consumers are willing to pay and what they actually pay.
Producer Surplus: The difference between what producers are willing to accept and the price they receive.
Market Efficiency: Achieved when total surplus (consumer + producer) is maximized, as in perfect competition.
What is Pareto efficiency, and why is it important in welfare economics?
Answer:
Pareto Efficiency: A state where no one can be made better off without making someone else worse off.
Importance: Indicates optimal resource allocation without trade-offs.
Application: Used to evaluate economic policies and market performance
How does the neoclassical concept of opportunity cost shape economic decision-making?
Answer:
Opportunity Cost: The value of the next best alternative foregone when making a choice.
Application: Helps allocate scarce resources effectively.
Relevance: Central to production, consumption, and trade-off decisions in neoclassical economics.
What is Walras’ Law, and how does it apply to general equilibrium theory?
Answer:
Walras’ Law: If all but one market are in equilibrium, the last market must also be in equilibrium.
Application: Demonstrates the interconnectedness of markets in an economy.
Implication: Ensures consistency in resource allocation across all markets.
What assumptions underlie the model of perfect competition? How does it differ from real-world markets?
Answer:
Assumptions:
Many buyers and sellers.
Homogeneous products.
Perfect information.
Free market entry and exit.
Differences: Real-world markets often have barriers to entry, differentiated products, and imperfect information, leading to inefficiencies.
Discuss the role of technological change in neoclassical economics. How does it drive economic growth?
Answer:
Technological Change: Innovations that improve efficiency and productivity.
Impact:
Reduces costs and increases output.
Enhances capital and labor productivity, shifting production possibilities outward.
Growth Driver: Essential for sustaining long-term economic growth and overcoming diminishing returns.
What is the Law of Diminishing Marginal Returns, and how does it affect production?
Answer:
Definition: As additional units of a production factor (e.g., labor) are added, the marginal increase in output eventually diminishes.
Impact:
Encourages efficient use of inputs.
Leads to higher costs when excessive inputs are used, impacting profit maximization.
Application: Important for understanding production optimization.
Explain Alfred Marshall’s contributions to demand and supply analysis.
Answer:
Contributions:
Integrated demand and supply curves to explain price determination.
Introduced the concept of elasticity to measure responsiveness.
Developed consumer and producer surplus as tools to assess market efficiency.
Legacy: Provided a microeconomic foundation for neoclassical economics.
What is the significance of the Marginal Revolution in economic thought?
Answer:
Marginal Revolution: Shift from classical to neoclassical economics by focusing on marginal utility and productivity to explain value and distribution.
Key Thinkers: Jevons, Walras, Menger.
Significance: Replaced labor-based value theories with utility-based approaches, transforming price and demand analysis.
What is the principle of “utility maximization,” and how does it influence consumer behavior?
Answer:
Utility Maximization: Consumers aim to allocate their resources to maximize total satisfaction.
Mechanism:
Marginal utility per dollar spent is equalized across goods.
Consumers adjust consumption based on prices and income.
Impact: Drives demand curves and forms the basis of neoclassical consumer theory.
What are the key assumptions of neoclassical economics?
Answer:
Key Assumptions:
Rational decision-making by consumers and firms.
Perfect competition in markets.
Full information available to all participants.
Marginal analysis determines choices.
Importance: Provides a framework for understanding market efficiency and resource allocation.
What is the role of time in Alfred Marshall’s short-run and long-run analyses?
Answer:
Short Run: At least one input (e.g., capital) is fixed, limiting flexibility.
Long Run: All inputs are variable, allowing full adjustment to market changes.
Impact: Distinguishes between temporary and permanent responses to economic changes.
What is the concept of “normal price” in Marshall’s analysis?
Answer:
Normal Price: The price at which demand and supply balance over the long term.
Adjustment Mechanism: Short-term market price fluctuations converge toward the normal price due to changes in production and competition.
How does the principle of marginal cost relate to production and pricing?
Marginal Cost: The additional cost of producing one more unit of output.
Relevance:
Firms produce until marginal cost equals marginal revenue.
Ensures profit maximization.
Application: Key to pricing and output decisions in competitive markets.
What is the principle of diminishing marginal utility, and how does it shape consumer choices?
Answer:
Diminishing Marginal Utility: The satisfaction gained from consuming additional units of a good decreases.
Impact:
Consumers prioritize spending on goods with higher marginal utility relative to price.
Explains downward-sloping demand curves.
What is Walras’ tâtonnement process, and how does it achieve equilibrium?
Answer:
Tâtonnement: A trial-and-error process where prices adjust until supply equals demand in all markets.
Mechanism: Auctioneer adjusts prices based on excess supply or demand until equilibrium is reached.
Significance: Central to general equilibrium theory.
How does neoclassical economics explain factor pricing?
Answer:
Explanation: Each factor (land, labor, capital) is paid according to its marginal productivity.
Mechanism:
Wages: Determined by marginal productivity of labor.
Rents: Reflect productivity of land.
Profits: Based on productivity of capital.
Outcome: Ensures efficient resource allocation.
What role does perfect competition play in neoclassical economic models?
Answer:
Perfect Competition: A market structure with many buyers and sellers, homogeneous products, and no barriers to entry.
Role:
Ensures price-taking behavior by firms.
Maximizes efficiency, with no deadweight loss.
Provides a benchmark for evaluating real-world market structures.
What is consumer equilibrium, and how is it achieved?
Answer:
Consumer Equilibrium: The point where a consumer maximizes utility within their budget constraint.
Mechanism: Marginal utility per dollar spent is equalized across all goods.
Outcome: Optimizes resource allocation for the individual.
Describe the primary philosophical foundation that influenced neoclassical thinking, including the contributors to the marginalist revolution.
Answer:
Philosophical Foundation:
Rooted in utilitarianism, emphasizing individual preferences and utility maximization.
Marginalist ideas replaced classical labor-based theories with value derived from individual decision-making.
Contributors:
William Stanley Jevons: Introduced marginal utility to explain consumer behavior.
Carl Menger: Highlighted the role of subjective value in determining prices.
Léon Walras: Developed general equilibrium models based on interdependent markets.
