Marshall believes that a correct understanding of the influence of time and careful handling of the relationship between economic variables can solve the debate about whether the production cost or utility determines the price. The demand curve of the final product is inclined to the lower right, because individuals will buy more when the price is lower. The shape of the supply curve depends on the division of the analysis period. Regarding price decision, the shorter the time, the more important the demand; The longer the time, the more important the supply. In the long run, if the fixed cost exists and the supply is completely elastic, the price will depend entirely on the production cost. It is meaningless to exaggerate the role of any party in price determination. Marshall's analogical explanation of the cause of things is not a simple problem, and any attempt to find a simple reason is bound to fail. More importantly, Marshall insisted that marginal analysis was abused by many economists. He said that these economists believe that marginal value (cost, utility or productivity) determines the overall value in some way. For example, when analyzing the price of the final product, according to Marshall's point of view, it is wrong to say that marginal utility or marginal cost determines the price. Marshall believes that utility or marginal cost does not determine the price, because the value that changes with the price is determined by the marginal behavior of these factors. At this time, Marshall once again skillfully explained his point of view by analogy. Jevons separated the main factors (utility and cost) that determine the price from the price. He made a mistake when trying to find a simple causal chain-production cost determines supply, supply determines marginal utility, and marginal utility determines price. Because he ignored the interrelation and mutual influence of these factors. If you put three balls in a bowl, one is marginal utility, the other is production cost, and the third is price, then it is obviously wrong to say that the position of any ball determines the position of other balls. The correct statement is that these balls mutually determine the position of each ball. Demand, supply and price affect and determine each other at the margin.
Marshall tried to explain the relationship between his price theory and Ricardo's value theory, and the debate about who decides the price between utility and production cost. Marshall thinks that his theory is basically consistent with Ricardo's. However, he pointed out that Ricardo recognized the role of demand, but because the impact of demand is easy to understand, he only paid limited attention and spent his main energy on more difficult cost analysis, which is difficult for marginal utility scholars to agree with. Marshall found that the production cost of Ricardo's value theory includes labor cost and capital cost. Most scholars in the history of economic theory think that this is an exaggerated explanation of Ricardo. According to Marshall's point of view, the main shortcoming of Ricardo's value theory is that he can't handle the influence of time and express his views clearly. Marshall refused to accept jevons and other scholars of marginal utility theory. They thought Ricardo's value theory had been completely overthrown and replaced Ricardo's theory with a correct method, that is, almost all the attention was focused on demand. When Marshall inspected jevons's expansion and development of Ricardo's theory, he thought that his treatment of Ricardo deviated from the basis of Ricardo's complete value theory. Marshall pointed out that the influence of demand on price determination is easy to understand, which may be correct. However, there are several theoretical questions about demand that Marshall cannot answer satisfactorily. He seems to be aware of these difficulties and avoids them by assuming. His most important contribution to demand theory is to express the concept of demand price elasticity with clear formulas. Price and demand influence each other, and the demand curve inclines to the lower right. The degree of correlation between price change and demand change is called price elasticity coefficient, that is, ED =-% demand change/%price change =-(△ q/q)/(△ p/p).
The negative sign on the right side of the equation is because the price is negatively related to demand, so the coefficient is usually negative. The price of a single product multiplied by the demand will be equal to the total consumption of the buyer or the total income of the seller. If the price drops 1% and the demand increases 1%, the total expenditure of the buyer or the total income of the seller remains unchanged, that is, eD = 1. If eD > 1, it means that the price is flexible, such as eD.
According to Marshall, individuals need goods because they can get utility through consumption. The form of Marshall's utility function can be added, and he gets the total utility by adding up the utility of consuming each commodity. The utility of consumer goods A depends on the quantity of consumer goods A, not on the consumption quantity of other commodities. The relationship between substitution and supplement can be ignored, and a utility function that can be added is: u = f1qaf2qbf3qc ... fnqn.
The utility function considering the relationship between substitution and supplement is expressed as follows: U = f(qA, qB, qC, ... qn).
Edgeworth and irving fisher, contemporaries of Marshall, proposed a more general utility function. We will briefly discuss the most important significance that Marshall utility function can summarize, which is related to income utility. Marshall believes that utility can be measured by the price system. He also believes that it is possible to compare among a group of people, because when comparing with the same group of people, the special situation of individuals is removed.
Marshall was the first to express the usual law of demand: demand increases with price decline and decreases with price increase. He noticed that the information collected by Robert Ji Fen showed that the bread demand curve of the poor may be upward; In other words, for these people, the increase in the price of bread will lead to a decrease in the demand for meat or more expensive goods and an increase in bread consumption.
Let's go back to the theoretical problem of deriving the demand curve and see how Marshall handled it. Because he uses additive utility function, he ignores the relationship between substitution and supplement when he deduces the demand curve mathematically, although he has discussed these problems. Marshall only assumes that the income effect of small price changes can be ignored, or in other words, any small change in commodity prices will not affect the marginal utility of money. Marshall solved these theoretical problems by assuming that the marginal utility of money remains unchanged for two reasons: first, he did not have theoretical tools to clearly distinguish between substitution effect and income effect. Secondly, the income effect of small changes in commodity prices is very small and can be ignored. Marshall laid the foundation for the generally accepted cost and supply analysis. His most important contribution to the supply theory is his concept of time stages, especially short-term and long-term concepts, and correctly recognizes the difference in the shape of short-term and long-term industry supply curves in the market stage; Although his economic explanation of these shapes is usually inadequate and confusing, sometimes even wrong. The market period did not cause any difficulties, when the supply was completely inelastic. In the short term, modern micro-theory holds that the shape of supply curve is because enterprises and industries follow the law of diminishing returns. For the purpose of analysis, Marshall pointed out that it is useful to divide enterprise costs into fixed costs and variable costs in the short term. However, Marshall did not establish a clear relationship between his division of fixed costs and variable costs and the origin of the short-term cost curve of enterprises based on the law of diminishing returns. He mainly applied the law of diminishing returns in the long-term analysis of land.
Marshall's division of fixed costs and variable costs proves that even if losses occur in the short term, enterprises will continue to operate as long as they can make up for all variable costs. This has become an important part of the economic analysis of enterprise behavior in the short and medium term in standard textbooks. In a perfectly competitive industry, the short-term supply curve of an enterprise is the part where the marginal cost curve exceeds the average variable cost curve. Because of his unique realism, Marshall went on to conclude that the short-term supply curve of enterprises in reality is not the case. He said that enterprises will hesitate to sell goods at a price lower than the full cost (fixed and variable) for fear of "grabbing the market". "Grab the market" means selling at a low price today to prevent the market price from rising tomorrow, or selling at a low price will cause dissatisfaction among other enterprises in the industry. Therefore, when the loss occurs, the real short-term supply curve is not the marginal cost curve between the average variable cost and the average cost, but the supply curve on the left. Here, Marshall implicitly lowered the assumption of a perfectly competitive market, because under the strict definition of perfect competition, no enterprise will care about the consequences of the actions of other enterprises in the market or industry. The enlightenment of Robinson's imperfect competition and Chamberlain's monopoly competition can be found in Marshall's exposition on market operation under the assumption of exemption from perfect competition.
Although Marshall's exposition on enterprise's long-term cost curve, supply curve and industry curve is obviously insufficient by modern standards, his early efforts in this field led to a series of interesting articles in the 1920s and 1930s, the most important of which were those of Frank Hennemann Knight, Piro sraffa and Jacob Vaina. Marshall revealed the long-term factors that determine the shape and position of enterprise cost and supply curve. The first is the internal factors of the enterprise. With the expansion of enterprise scale, internal economy (which means that manufacturers reduce production costs by making full use of fixed equipment or strengthening specialization when expanding production) leads to cost reduction, while internal diseconomy (which means that manufacturers reduce productivity and increase costs when expanding production) leads to cost increase. Marshall's discussion on the internal economic reasons of scale is very satisfactory, but there is little discussion on the internal diseconomy. He did not really encounter the relationship between economy and non-economy and its influence on the optimal scale of enterprises.
However, Marshall's exposition on external economy and diseconomy triggered a lot of literature. Marshall tried to use historical evidence to adjust the short-term supply curve of enterprises and industries: in some industries, costs and prices fell over time. His adjustment is based on his external economic viewpoint. The external economy-Marshall never knew whether they were for enterprises or industries-caused the cost and supply curves of enterprises and industries to move down with the development of industries. In this case, the long-term supply curve of the industry will be inclined downward: supply more goods at lower prices. The most important external economy is to reduce the cost of all enterprises in the industry by putting all enterprises together and sharing information with each other. This configuration has also led to the cost reduction of some other industries and the acquisition of skilled workers.
Marshall's comments on cost and supply have caused many important theoretical problems, which have been tested from 1900 to 1940. These questions are: What are the economic reasons for the shape of cost and supply curve? Why does the supply curve rise in the short term and the cost and price of some industries fall in the long term? Is the internal and external economy in harmony with the competitive market? Marshall's explanation of the factors that determine the price of production factors and income distribution is consistent with his other analyses. He explained land rent, wages, profits and interest rates by analyzing the relationship between supply and demand and distinguishing between short-term and long-term to explain the final commodity price. He believes that the demand for a factor of production is a derivative demand, which depends on the value of the marginal output of the factor. Marshall solved the problem of measuring marginal output with what he called marginal net output. Marshall went on to point out that it is incorrect to call the factor theory that determines the marginal productivity distribution theory as marginal productivity distribution theory, because marginal productivity is only a measure of the demand for a factor, and the factor price is determined by demand, supply and marginal price. Its measurement is related to labor and wages. Marshall advocated a very cautious explanation of marginal productivity theory. Marshall's analysis of the return of wages, land rent and profits on a single factor of production and interest rate is not particularly interesting, but the development of the concept of quasi-land rent related to his factor price and distribution theory deserves attention.