The
Limits of the| by Andrew Rowson, supervised by Prof. A.R.Champneys | ||
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Neoclassical Economics
The marginalist revolution The foundations of Neoclassicism are ascribed to three men, William Stanley Jevons, Carl Menger and Leon Walras, who between 1871 and 1874, captured the essence of supply and demand in what became known as the 'marginalist revolution.'   
Jevons, Menger and Walras At the centre was the concept of value which can have two meanings; value in use (utility) and value in exchange (price). In classical economics, prices were determined by the relative cost of production - scarce goods were more difficult to produce and hence more expensive to buy but the price of a good was seen as independent of its usefulness. In Neoclassical thinking it is utility which is dominant and in particular the idea of diminishing marginal utility. Consumers act to maximise the utility gained from goods by increasing their purchases until the gains from additional purchases is balanced by what has to be given up. Similarly firms act to maximise profits by producing enough units until the cost of producing additional units is just balanced by the revenue generated. Concern with the actions of economic agents means that this is a microeconomic theory. The theory is famously illustrated in the supply and demand curves which determine the equilibrium price and quantity of the goods supplied. Shifts in either curve correspond to changes in the levels of supply or demand and lead to a new equilibrium. At a higher than equilibrium price, unsold goods (gluts) exert a downward force on price to restore equilibrium while, below equilibrium, excess demand (or shortage) creates an upward pressure. 
Supply and demand curves showing the effect of a shift in the level of demand |
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