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Economic Principles

15 Dec 2017Essay Samples

This paper sheds light on various economic concepts from Neoclassicism era and also discusses their survival and validity in the 21st century. Neoclassic economics developed concepts, which are still popular in certain areas, because they were parallel to the principles of a free economy. But some changes were introduced in certain models and concepts when they were considered flawed and no longer appeared valid.

1) Marshallian school of thought was primarily concerned with marginal utility theory. These economists were of the view that value of a good is determined by demand for that good instead of the costs that were incurred during its production. They maintained that consumers were interested in buying a particular thing till the utility they derive from it equals the utility of the thing that they have given up to obtain the desired object. “The marginal utility of a thing to anyone diminishes with every increase in the amount of it he already has." [Marshall's Principles, p. 93] This concept laid the very foundation of neoclassic school of thought and therefore those who followed Alfred Marshall’s theory also maintained that utility principles applied not only to consumers but also to all factors of production. On the other than Institutionalism dismissed the importance of utility in economics and focused more on the importance of the institutions and their internal working. Institutionalists did not believe that people were driven by 'utility principle' and felt that man alone could not influence the market forces. Malcolm Rutherford explains,

“…Institutionalism can be associated with a stress on (i) the importance of institutions on economic behavior and organization, (ii) the changing or evolutionary nature of such institutions, (iii) the need to study the actual operation of economic institutions and rely less on highly abstract theorizing, (iv) the basis of many economic problems and failures in the existing institutional structure, and (v) the need for institutional reform.” Walras’s theory of general equilibrium was not exactly parallel to Austrian economic theory and therefore while both belonged to neoclassic school of thought, they are still fundamentally different in their study of market forces. While the Walras’s general equilibrium theory was later dismissed and replaced by Paretian Model, Marshall’s theory of utility has been able to survive and is still applicable to certain areas of economic and social activity.

2) Marginal utility theory, as mentioned above, can still be observed when social and economic problems are analyzed but certain things have certainly changed. For example marginal utility theory assumed that people were rational beings who always made decisions rationally and in their best interest. But this rationality theory has been dismissed in the 21st century as we have noticed that while most people would want the very best for themselves in their limited income, still there are times when they are driven more by preferences than rational thinking. This applies more to demand situation in the present times than it does to some social factors. Now let us explain it clearly with the help of some examples. In today’s world, it is believed that people are more interested in maintaining their social status, and for this reason, they would be willing to over-invest in certain products simply because others enjoy the same commodities in their social circle. For example, when purchasing power of people decrease, there is a chance that most people would not be able to afford the things that they were previously enjoying.

But in order to maintain the status quo, they would still purchase those commodities. This shows that diminishing marginal utility law doesn’t come into operation in certain situations. But now let us see how marginal utility does apply to other situations. Marginal utility principle is still valid in social situations for example the rising divorce rate can be explained through this theory, similarly rapid downsizing is also connected with marginal utility principle. This is because the companies lay off a worker when it appears that the cost of employing him is more than his individual productivity or contribution. Economic analysts now take into account the principles laid down by heterodox school of thought and not exactly marginal utility. This school maintains that growth of economy is dependent upon efficient use of governmental resources and privatization. The principles laid down by this school are parallel to Marshall’s theory of free economy but is not essentially related to the concept of marginal utility.

3) Macroeconomics studies market forces and dynamism of economy by focusing on the industries as a whole instead of individual firms and corporations. It is widely accepted that more than macroeconomics, it is the microeconomics which has proved to be more beneficial for study of market forces in these unpredictable times. This is because we have noticed that after September 11, several companies were forced to seek chapter 11 protection, but still the industries they belonged to did not crumble because there are still some strong players present. In this case, we can take the example of the recent collapse of K-mart. While the retail chain was the second largest mass merchandiser in the country before it ran into financial mess, the events of September 11 speeded up its downward spiral and thus the corporation declared bankruptcy in early part of the current year. But when we look at the retail industry as the whole, we notice that it has not only survived the collapse but it flourishing because of the presence of powerful corporations such as Wal-Mart and Target with former announcing 14 percent increase in its revenues in the first quarter of 2002. This brings us to the important conclusion that while macroeconomics is more suitable for the study of market forces in times of economic stability; it is microeconomics, which is required for market when economic conditions are highly unpredictable and uncertain.


  2. Alfred Marshall, Principles of Economics, 1890 

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