econ434notes16

econ434notes16 - History of Economic Doctrines Lecture 16...

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History of Economic Doctrines Lecture 16 Neoclassical Economics I The Marginalist Revolution Marginalism began to dominate microeconomic theory when thinkers aware of the frontiers of mathematics began applying calculus to economic reasoning during the middle of the nineteenth century. Although marginal analysis had been used earlier (notably, e.g., in David Ricardo’s theory of rent), the marginalist revolution, aside from its obvious usefulness, quickly began to influence economic analysis in areas of methodology, value theory, and utility theory. Marginalism Marginalism is the key to optimization. That people try to operate where marginal benefit = marginal cost: MB = MC is an article of faith for most modern economists. For example, people try to minimize cost subject to a given output, or to maximize value and output subject to a given cost. All the decisions are made at the margin . (Open link for more discussion.) Even lumpy decisions (buying a house or a car, for example) can be “at the margin.” You can buy cars more often, or get more options. Consider what seems to be a binary decision: Is marriage “Zero or 1?” Even marriage is not “zero or one” – there are many different forms of marriage. Pre-Marginalist Methodology Adam Smith The earliest economists were interested in the process of economic development and polices that can produce high rates of economic growth. Their theories blended economic analysis with history, and there was little interest in abstract economic theory per se . Ex. Adam Smith – the theory of absolute advantage Thomas Robert Malthus – the theory of population growth David Ricardo David Ricardo had transformed economic analysis both in terms of its scope and its method. Instead of contextual analysis, he focused on more abstract deductive analysis and emphasized internal logical consistency.
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