TOP1_08 - AGEC 5403 Production Economics Topic 1 A...

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AGEC 5403 Production Economics Topic 1: A Historical Perspective I. Evolution of the neoclassical theory of the firm. A. Classical period -- Adam Smith (1723-1790) and David Ricardo (1772-1823) 1. Smith 1776 An Inquiry into the Nature and Causes of the Wealth of Nations . Primarily concerned with the factors that led to increased wealth in a community. He rejected the physiocrats view of the preeminent position of agriculture, recognizing the parallel contribution of manufacturing industry. Labor was the fundamental measure of wealth. Specialization would make individuals better off. ( The Penguin Dictionary of Economics ) 2. Ricardo 1817 The Principles of Political Economy and Taxation. Developed theoretical model that abstracted from reality to reveal the major influences at work. Looked at capital, labor and the return to land. Law of diminishing marginal productivity and comparative advantage for international trade. Prices based on labor, principally but recognized capital costs did have an influence. He recognized the importance of increasing demand with scarce resources. B. Post-classical period -- Antoine Cournot (1801-1877), William Jevons (1835-1882), Carl Menger (1840-1921), and Marie Walras (1834-1910) 1. Cournot 1838 Recherches sur les principes mathematiques de la theorie des richesses. Set out mathematical form the apparatus of the theory of the firm. Used calculus to show that the monopolists would maximize profit at the point where marginal costs equals marginal revenue. Traced logic to duopoly, oligopoly, to unlimited competition. Marshall picked up and used his ideas. 2. Jevons 1871 Theory of Political Economy. One of three economists (Menger and Walras) to independently put forward a marginal utility theory in the 1870s. Ratio of the prices of commodities would equal the ratio of their marginal utilities. Developed rate of interest as the ratio of output gained by the increase in time capital remains invested divided by the amount invested. One of founders of econometrics, invented moving averages. 3. Menger 1871 Grundsatze der Volkswirtschaftslehre. Marginal utility theory. Exchange takes place because individuals have different subjective values for the same commodity. Overemphasized consumptive demand in the theory of value. 4. Walras 1874-7 Elements d'economie Politique Pure. Marginal utility theory. Showed how prices at which commodities exchanged are determined by the AGEC 5403 Spring 2008 Page 1 Joe Schatzer
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relative marginal utilities of the people taking part in the transaction. Also constructed general equilibrium model as a system of simultaneous equations in which he tried to show all prices and quantities are uniquely determined. C. Neoclassical period-- Alfred Marshall (1842-1924)
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TOP1_08 - AGEC 5403 Production Economics Topic 1 A...

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