MacroeconomicsI_working_version (1)

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Chapter 2
contributed to repealing of the Corn Laws preventing England from imported corn. D.
Ricardo’s free ideas supported free trade helped to develop the process of industrialisation
in England.
J.S. Mill belonged among the classics of the second generation. He developed the cost of
production theory of value. He shared the liberal ideas in term of market’s abilities to
allocate the resources. However he doubted the market’s ability to distribute income
effectively (in order to maximise the satisfaction (welfare) of the population.)
2.2. Neo-classical Economics
• Followed the classical economics in terms of liberal approach;
• object of interest: Microeconomics; approach: Liberal; methodology: Abstraction,
Individualism, subjectivism, Mathematical methods;
• two main tasks: Economic equilibrium, Economic welfare;
• based on ideas of Marginalists (C. Menger, W. S. Jevons);
• main schools: Cambridge school (A. Marshal, A. Pigou), Lausanne school (l. Walras,
V. Pareto).
Marginalist School (Marginalist Revolution)
• The year of 1871 was a milestone in history of economic thought. The books Theory of
Political Economy by William S. Jevons and Principles of Economics by Carl Menger
were published in that year. Those books brought a radical change in a way and method
of economic theorising.
• Both of them (independently) introduced the theory of marginal utility.
• The marginal theory of value asserts that the economic value of an object or service is
set by consumer’s marginal utility. This view presents the subjective theory of value
(which opposed the objective theory of value by classics). The price of an object
depends on the (marginal) amount of consumer’s satisfaction provided by individual
goods and services.
• The theory focused on a consumer (microeconomic view).
• Theory of marginal productivity (John B. Clark) explained the way of distributing of
income between wages and profits – wage is determined by marginal productivity of
labour and profit (yield) by marginal productivity of capital.
• Marginalist revolution was a starting point for two following schools – the neo-classical
school and the Austrian school.
Economic equilibrium (positive part of the neo-classical economics)
• General equilibrium (L. Walras) – The idea of general equilibrium of all markets is
based on the clearing prices and wages which clears markets (from the excess of
demand or supply). L. Walras defined the preconditions (such as perfect
competitiveness) and created imposing mathematical model of general equilibrium.
• Partial equilibrium (A. Marshal) – Marshall examined the equilibrium on the market
of individual goods or services. Famous Marshal’s scissors consisted of negatively
sloped demand function and positively sloped supply function. The point of intersection
determines the equilibrium price – the dualistic approach to the value (price) included
both objective (supply side) and subjective (demand side).