Alfred Marshall

Definition

Alfred Marshall was a renowned British economist who is considered one of the most influential figures in the development of modern economic theory. His contributions were particularly significant in the areas of price elasticity of demand, price elasticity of supply, and the concept of elasticity in general.

5 Must Know Facts For Your Next Test

1. Alfred Marshall developed the concept of price elasticity of demand, which measures the responsiveness of quantity demanded to changes in price.
2. Marshall's analysis of price elasticity of supply, which measures the responsiveness of quantity supplied to changes in price, was also a significant contribution to economic theory.
3. He introduced the concept of constant elasticity, where the elasticity coefficient remains the same regardless of the price level.
4. Marshall's work on the polar cases of elasticity, such as perfectly elastic and perfectly inelastic demand or supply, provided important insights into market behavior.
5. The Marshallian cross, a graphical representation of the equilibrium price and quantity determined by the intersection of the demand and supply curves, is a key tool in understanding market dynamics.

Review Questions

• Explain how Alfred Marshall's concept of price elasticity of demand relates to the behavior of consumers in a market.
  • Alfred Marshall's concept of price elasticity of demand measures the responsiveness of the quantity demanded of a good or service to changes in its price. A high price elasticity of demand indicates that consumers are highly sensitive to price changes, and a small change in price can lead to a large change in the quantity demanded. Conversely, a low price elasticity of demand means that consumers are less responsive to price changes, and a larger change in price is required to significantly affect the quantity demanded. This understanding of how consumers react to price changes is crucial for businesses and policymakers in making informed decisions about pricing, production, and market interventions.
• Describe how Alfred Marshall's analysis of price elasticity of supply contributes to our understanding of market dynamics.
  • Price elasticity of supply, as developed by Alfred Marshall, measures the responsiveness of the quantity supplied of a good or service to changes in its price. A high price elasticity of supply indicates that producers can readily adjust the quantity they are willing to sell in response to price changes, while a low price elasticity of supply means that producers are less able or willing to change the quantity supplied. This understanding of how producers react to price changes is important for predicting market outcomes, such as the impact of government policies or external shocks on prices and quantities traded. Marshall's work on price elasticity of supply provides a framework for analyzing the flexibility of producers in a market and how that flexibility affects the overall market equilibrium.
• Evaluate the significance of Alfred Marshall's concept of constant elasticity and its implications for understanding market behavior.
  • Alfred Marshall's introduction of the concept of constant elasticity was a significant contribution to economic theory. Constant elasticity means that the elasticity coefficient, whether for demand or supply, remains the same regardless of the price level. This has important implications for understanding market behavior. For example, if demand has a constant elasticity, it means that a 1% change in price will always result in the same percentage change in quantity demanded, regardless of the starting price level. This allows for more predictable and consistent analysis of market responses to price changes. Additionally, the concept of constant elasticity is a key assumption in many economic models, as it simplifies the analysis and allows for more robust theoretical predictions. Marshall's work on constant elasticity has thus become a foundational element in the study of price responsiveness and market dynamics.

Related terms

Demand Curve: A graphical representation of the relationship between the price of a good or service and the quantity demanded, with quantity on the x-axis and price on the y-axis.

Supply Curve: A graphical representation of the relationship between the price of a good or service and the quantity supplied, with quantity on the x-axis and price on the y-axis.

Elasticity: A measure of the responsiveness of one variable to changes in another variable, often used to describe the sensitivity of demand or supply to changes in price.