In modern society, one cannot do without knowledge of the fundamentals of economics. And what are they? At the heart of the economy, supply and demand is the so-called Marshall Cross. And it is a kind of emblem of this science. Therefore, we dwell on it in more detail.
Alfred Marshall: A Brief Biography and Teaching
The future famous economist was born in the family of a bank employee in London. He studied at Oxford, and then at Cambridge. After graduation, Marshall worked as a teacher. In 1885, he became dean of the Department of Political Economy in Cambridge. Alfred Marshall has always been a supporter of free competition in market relations. Representatives of the classical trend and marginalism influenced his views.
The main merit of Marshall is that he was able to develop economic theory as an integral social science. During his lifetime, the scientist published the six-volume Principles of Economics, which is still considered a classic work in this area. Marshall did not take part in the dispute between proponents of the use of mathematical methods in economic science and the followers of "pure" science. However, it can be noted that in the “Principles of Economics” all argumentation is given only in verbal form, and all models and equations are put in applications. A special place in the economist’s teaching is occupied by the theory of supply, demand, and also equilibrium in the market. The latter is called the Marshall Cross.
Equilibrium point
Today, even a student who has just begun to study economics, it is clear that the price is set on the basis of supply and demand. Marshall's Cross is a schedule that is almost impossible not to remember. It is simple and sketchy, two curves meet at a point. The result is a “cross,” or “scissors,” with which it is easy to explain the process of establishing equilibrium in the market.
However, a little over a hundred years ago, this did not seem so obvious. The first to balance the market between supply and demand was precisely what Marshall portrayed. He correctly explained the slopes of the curves and how they interact. The Marshall Cross in the economy has made a real revolution. Today, the market price and the equilibrium volume are in the vocabulary of even ordinary inhabitants. And they are at the center of any theory. The scientist has done a lot for the development of economic science. However, its legacy can be divided into four areas: demand, supply, market equilibrium and income distribution. Let's start with the first one.
Demand theory
Marshall builds her on two approaches. This is a rise in prices and saturation of consumer demand. They allow you to see the objective and constructive logic behind the subjective behavior of consumers. Marshall also separated aggregate demand from individual demand. In addition, he developed the concept of “price elasticity”. Moreover, Marshall gave a fairly modern interpretation of this concept. He gave a mathematical justification for designating demand as elastic.
In addition, the scientist drew attention to the position of the equilibrium point in the Marshall Cross, depending on the length of the considered period of time. The economist said that the shorter it is, the more influences demand, and the longer, the more influences supply, that is, production costs. It was Marshall who introduced the concept of “consumer surplus,” which was later developed in the theory of welfare. It represents the difference between the price a consumer is willing to pay for a product and its actual value.
About offer
The Marshall Cross reflects the behavior of not only consumers, but also manufacturers. In supply theory, Marshall separated the cash costs of production from the actual. The first is the payment for resources. The second - the costs of everything that is used in the production process, regardless of whether it was bought for money or is the property of the enterprise.
Marshall also drew attention to the increase and decrease in the return on factors in the context of expansion. He shared the concepts of fixed, marginal, and total production costs. In proposal theory, Marshall also introduced a time factor. In particular, he argued that in the long run, fixed costs become variable.
About market equilibrium
At the center of this theory of the scientist is the Marshall Cross. He justified price as a market regulator. Marshall considered it on a par with forces such as supply and demand. The scientist also introduced the concept of equilibrium volume, that is, such a quantity of a product that satisfies both consumers and manufacturers. Marshall argued that in conditions of free competition, if the market price begins to exceed the equilibrium price, demand falls, and this leads to a drop in value. He also analyzed the influence of territorial and temporal factors. Marshall emphasized the need to separate the features of the short and long periods. He emphasized that in the first regulator there is demand, in the second - supply.