11/05/2004

Thinking on the Margin

Everyday we check the news and there is always something involving oil. Today it is considered common understanding how oil can have an effect on everything. Marginal analysis started a long time ago by forerunners such as Leon Walras, Carl Menger, and William Jevons. This evolved into neoclassical thinking by pioneers such as Alfred Marshall. Much of the principles of economics that we study today come from these schools of thought.

Walras is credited with furthering marginal analysis through general equilibrium. Through this he was able to demonstrate the effects of changes in supply and demand in all markets and not just a single one, for instance oil.

Partial equilibrium analysis held that everything remained unchanged, except for the variable being studied. General equilibrium analysis shows the how other factors can change. In the case of oil, a reduced quantity of oil will drive prices up. But this will also affect the demand for substitute goods such as coal. It also affects the price of gasoline and even things sucn as a the demand for automobiles and car washes.

All of this pertains exactly to managerial economics as we study regression analysis and use econometrics to find the demand for a firms product and the demand for inputs.

6 comments:

John West said...

I have never heard of any of these men before and it is interesting to learn of their economic contributions. It is good for the disciplne(Econ.) to have other recognizeable names within peoples minds. One persons passion may lie in something someone before has pioneered. I personally think that Adam Smith is the most notable father of economics and The Wealth of Nations is a fabulous read.

Anonymous said...

Before I came to college I was ingorant to any concept of economics. After taking three diffent courses in the study of economics it is beginning to come clearer that economics are all around us. Just the simple idea mentioned by Peter Parker that a reduced quantity of oil will drive gasoline prices up, and get people to start looking to cheaper substitutes. Most people don't even realize these changes that are happening around them everyday. I beleive that an understanding of economics really can help business managers and everyday people understand better why things are the way they are, and how they can adapt to the changes around them.

miles said...

It is interesting how economic principles can be applied in everyday situations. Until taking the economic classes, I realized that many of the things that we do are in response to supply and demand. When the demand is too high or the supply is limited, we do go looking for substitutes. As with the oil issue and the substitutes that are and could be out there, I am suprise that people aren't responding or implementing the ideas faster.

Julie said...

Sometimes, especially after reading Armchair Economist, I think that economists must be the smartest people in the country. They see things in such different ways than the rest of the population, coming up with solutions that are the most effecient and beneficial. I think sometimes it must be frustrating, though, to be able to see how things could be but to have the general public totally unaware of, or even against, your ideas.

Maudi said...

I feel that Mr. Walrus and his fellow economists had some wonderful ideas of what needed to be done in order to better understand marginal analysis through equilibrium. It is guys like these that have helped the U.S. stay on top. We must continue our struggle to better understand Marginal Analysis and what it will do for us.

Dr. Tufte said...

You can find biographies of people like this at the Library of Economics and Liberty. They were contemporaries, working in the last half of the 19th century, and into the early 20th century.

These guys made tons of fundamental contributions. Marshall and Walras though, are known for partial equilibrium and general equilibrium analysis. Partial equilibrium is where you throw out an argument, and ignore other stuff by claiming "other things being equal" (ceterus paribus in Latin). General equilibrium is where you try to include all of the possible effects to trace out how the relate to each other. General equilibrium is harder, but is on a long upswing because it gives better answers.

More broadly, Marshall invented the idea of supply and demand. He also was the originator of the idea of elasticity, and consumer surplus. He is the most influential of the four because the wrote a prominent textbook.

Walras was the most poorly known in his lifetime, and the best known today. He was the first to recognize that economic theory implies that prices (and quantities) are unique - that's why Wal-Mart charges you the same price for different packages of identical items. The idea of excess supply and excess demand (fundamental to the later theory of price ceilings and price floors) also comes from Walras.

Menger is the founder of a branch of economics known as Austrian (it underpins a lot of libertarian political positions). Menger was the first to recognize that all voluntary exchanges benefit both parties (thus the name of my personal blog). He was also the first to deliver a reasonable argument why Marxist theory is wrong. He also was the first one to offer an answer to the diamond/water paradox that shows up in principles texts.

Jevons is the person who figured out that optimal behavior requires that the ratio of marginal utility to price be the same for all goods. He didn't do this with constrained optimization, rather that is a technique that under the proper conditions yields Jevons result as an answer. This equality of ratios is saying that equilibrium is achieved when the rate at which you substitute goods internally is equal to the external rate you can exchange them in the market.

P.S. I think that John_West is joking that The Wealth of Nations is a good read ... even professionals have trouble slogging through that sometimes.