Question

a) The marginalists found that the classical theory of value was inadequate to explain the forces determining prices. Value does not come from the past but value comes from the future. Factors of production are not price-determining but price-determined. Discuss ( 30 marks)

b) The study of an economy is complex and difficult. How did Marshall address this problem? How did he reconcile the positions of the classical and marginal Wily schools?

Answer 1

a) The marginalists found that the classical theory of value was inadeqaute to explain the forces determining prices because cost of production theory lacked generally because it could not anlayze prices of some goods

• Labor theory of value( Ricardo) and cost of production theories(senior and Mill) required separate explanation for goods with fixed supply because value did not depend on production cost.
• Theory suggested prices comes from cost incurredin the past. Jevons, Menger and Walras said large production costs will not necessarily result in high prices
• Marginal utility theory which means value depends on utility and comes from the future because dead stock which says that when demand for good decreases then the prices will be less than the cost of production and value of factors of production determined by marginal utility recieved from consuming final products
• Classicals used total or average utility but it is marginal utility that is significant theory, value depnds on utility and comes from the future

It was also inadeqaute because profits occurs when a firm sells a good or services for more than it cost to produce.So we should able to understand profit by understanding the prices of the goods and services the company sells and the prices of the inputs including labor that the company buys.However the term price usually connotes something temporary.Prices may rise or fall based on temporary shifts of demand or even in changes in weather.

b)Marshall address the problem of study of an economy by introducing the concept of three periods in his books principles of economics.

• First is the market period, the amount of time for which the stock of a commodity is fixed
• Second, the short period is the time in which the supply can be increased by adding labor and other inputs but not by adding capital
• Third, the long period is the amount of time taken for capital to be increased

To make economics dynamic rather than static, Marshall used the tools of classicals mechanics, including the concept of optimization

Marshall hoped to reconcile the position of classicals and marginal wily schools by focussing more on cost.He noted that in short run supply cannot be changed and market value depends mainly on demand, in an intermediate time period, production can be expanded by existing facilities such as buildings and machinery but since these do not require renewal within this intermediate period their cost have little influence on the sale price of the product. He also pointed out that it is prime or variable costs which constantly recur that influence the sale price most in this period