NeoClassical Economics

Question 1

Rise of Neoclassical Economics: The Marginalist Revolution

Answer 1

• Attempt to overturn LToV to establish scientific footing
• Theory to stop strikes
• Relates supply and demand to individuals rationality and ability to maximise utility/ profit
• ‘constrained choice’ - individuals understood as choosing agent - choose based on how affect person
• Humans engage in purposeful behaviour - rational beings - always know what want (predictable)
• Starting point NOW self-interested individuals seeking happiness - not classes

Question 2

Subjective Utility Theory: Theory of Supply

Answer 2

• Theory of value grounded in intensity of subjective feelings
• Value determined by importance person places on commodity in conditions of scarcity
• Value measured by marginal utility - value attached to each additional commodity
• Theory of diminishing marginal utility - first unit more utility than later units
• Practically, Neo-Classical Economics links welfare and choice - greater level of choice, greater welfare
• Less choice - higher costs, higher demand for one product type
• Argues against government intervention/ nationalisation - limiting markets, limits choice, limits well-being

Question 3

Supply and Demand and General Equilibrium

Answer 3

• Alfred Marshall (Principles of Economics)
• Marshall believe price of commodity determined by supply and demand
• Believe whole economy trend toward equilibrium
• Perfect balancing of supply and demand if perfect competition and free market operation (no state intervention)
• Economic crisis not intrinsic feature of capitalism

Question 4

Theory of Distribution

Answer 4

• Land, labour and capital with unique distributive share
• Wages - reward for human effort SO not only working class in receipt of
• Production with costs and sacrifices - risk is rewarded
• Supplies of productive services compensated through wages
• Pure profits due to temporary disequilibrium OR monopoly
• REJECT class orientated scheme

Question 5

Analysis of Price

Answer 5

• Behaviour of consumers and producers KEY in market function
• Men act rationally in pursuit of own advantage
• Suppliers expected to seek maximum reward
• Expect buyers to purchase more of commodity at lower price - diminishing marginal utility BECAUSE decline in satisfaction with each purchase
• Neoclassical economists - economic system = production of satisfactions via commodities and services
• Explanation of price = intersection between supply and demand
• Price above equilibrium = sellers offer more than buyer take SO reductions in price
• Sub-equilibrium price = frustrations for potential buyers SO competitive bidding push price down

Question 6

Theory of Production

Answer 6

1. Manner in which producer set about combining productive factors
2. Adjustments producer expects to make when conditions alter
   - Profit maximisation = reducing costs
   - Output enlarge to respond to increased demand
   - Adjust by changing intensity - more workers hired, more raw materials acquired
   - Sustained increase = increase productive capacity to reduce costs
   - Small number of large producers = lower unit cost operation - businesses erode on basis of competitive order

Question 7

Prospects for the Competitive Order

Answer 7

• Potential danger to competitive order with growth of large businesses with lots of market power (monopolies)
• 2 types of market structure:
  1. Special market =individual firms operate in isolation/by-product of existence special clients
  2. General market - surrounding special market, exposed to competition
• Expanding beyond special market = checked economic power - could kill off
• Today cannot apply
• Separation of management and ownership = survival power immortality
• Not well-suited to mass-markets or mass consumption
• Tastes of public wide-ranging and not-class specific

Question 8

Aggregative Strand of Marshall’s Thought

Answer 8

• Say’s Law - all income to be spent
• Interest rates est. through interaction of supply of loanable funds (fed by saving) and demand for loanable funds
  - Demand increase = interest rates rise
• Say’s Law didn’t allow for Economic Instability
  - Observe boom and bust cycles as waves of optimism and pessimism

Question 9

Marshall - Long Period Economic Change

Answer 9

• No revolution
• Rents rise with economic expansion (demand for business and residential sites rise)
• Agricultural technologies increase productivity
• Workers grow in skill/energy/self-respect SO incomes increase
• Rates of interest appropriate measure of return to suppliers of capital - rate of interest fall with accumulation
• Technical improvement faster than classical economists anticipate

Question 10

Marshall and Economic Policy

Answer 10

• Opposed to socialist programme - collective ownership of means of production deaden energies of mankind
• Reluctant to recommend government intervention
• Market performance improve with better public education
• Remove speculation leading to harmful fluctuations
• Gov. plays useful role to improve market efficiency
• Re-allocation of resources via taxes

Question 11

Problems with Neo-Classical Approach

Answer 11

• Say’s Law
• Economic motives not only spurs to human action
• Not all rationally participating in market

Question 12

Say’s Law

Answer 12

-Belief markets always clear - supply and demand always balances (Say’s Law)
-Self-regulated markets - goods available correspond to those waiting to buy goods
(Quantity of goods offered = quantity of demand
-People offer goods + services so spend money expect to obtain
-Produce goods because know want to buy goods
- no money saving!
-Rate of interest sensitive mechanism for forming equilibrium between saving and investment
-Ensure income not spent on consumption is then spent on investment!