Economics Chapter: Partial Equilibrium Theory

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Questions and Answers

What is a key characteristic of Jevons' model of market equilibrium in an exchange economy?

It is based on the preferences of multiple consumers instead of two.

The model determines quantity and not absolute prices. (correct)

The market is analysed using a single equation with one unknown

It explicitly incorporates production costs to determine prices.

In Jevons' model of market equilibrium, what must be true of the rate of exchange between two commodities?

It must be equal to the ratio of marginal utilities for both consumers. (correct)

It must be equal to the average utilities of the commodities for both consumers.

It must be equal to the total utilities of the commodities for both consumers.

It is equal to the ratio of marginal utilities for consumer A, but not consumer B.

What is a significant limitation of Jevons' model of market equilibrium in an exchange economy?

It relies on unrealistic assumptions about consumer behavior.

It has more than two equations and too many unknowns.

It cannot be used to predict the outcome of trades in real-world settings.

It does not explain prices in relation to production costs. (correct)

Which of the following best describes Jevons' ambitions related to price theory?

To formulate a theory where cost of production and consumer demand have equivalent roles. Signup and view all the answers

What was one of Jevons' contributions to the field of economics?

He was a pioneer in empirical economics. Signup and view all the answers

What was the main point of contention in the Methodenstreit?

The role of history in economic analysis Signup and view all the answers

Which of the following statements accurately reflects the 'German School' of economics?

They believed that economic analysis should be based on a combination of historical and theoretical approaches. Signup and view all the answers

What is the key distinction between Carl Menger and the German historical school?

Menger advocated for a more abstract and theoretical approach, while the German historical school emphasized empirical observation and historical analysis. Signup and view all the answers

Which of the following is NOT a feature of Engels's law?

The law was derived solely from Engel's own research on Belgian working-class families. Signup and view all the answers

What is meant by the term 'income or Engels elasticity of food'?

The percentage change in food expenditure divided by the percentage change in income. Signup and view all the answers

Why did Eugen Böhm-Bawerk champion Carl Menger's theories after his death?

He saw Menger as a pioneer in the development of new economic theories. Signup and view all the answers

Why is it inaccurate to say that economics should be either purely theoretical or purely empirical?

Economic theory is ultimately based on real-world observations, and empirical data can be used to support or refute theoretical models. Signup and view all the answers

How did the Methodenstreit ultimately contribute to the development of economics?

It forced economists to consider the strengths and weaknesses of different research methods. Signup and view all the answers

In an ideal scenario, what should be true of all productive factors?

They should all be variable with no fixed factors. Signup and view all the answers

When unit costs remain constant, what is the shape of the resulting supply curve?

A straight line parallel to the quantity axis. Signup and view all the answers

According to Marshall, what type of economies of scale apply only to single firms?

Internal economies of scale. Signup and view all the answers

What is the primary critique leveled by Sraffa regarding changes in production volume and costs?

Changes in production volume in an industry can affect costs in other industries simultaneously. Signup and view all the answers

What does Sraffa argue about the analysis of price changes in a single market?

It is crucial to account for the repercussions within the entire economic system. Signup and view all the answers

Which approach involves considering interdependencies among agents and industries?

General equilibrium framework. Signup and view all the answers

What is a crucial condition for the independence of supply functions across different industries?

Variable costs must be internal to the industry. Signup and view all the answers

Beyond perfect competition, what two concepts should partial equilibrium analysis be complemented with?

General equilibrium and interdependencies. Signup and view all the answers

What was William Stanley Jevons' most famous work?

The Solar Period and the Price of Corn Signup and view all the answers

According to the content, what was the basis of the theory of value Jevons was trying to create?

Diminishing marginal value. Signup and view all the answers

Jevons sought to explain changes in the business cycle through which factor?

Exogenous factors. Signup and view all the answers

What was the basis for Jevons' hypothesis about periodic economic activity changes?

The periodicity of sunspots. Signup and view all the answers

In Menger's view, how are factor prices determined?

By the reduction in value of the finished good if the supply of the factor is reduced. Signup and view all the answers

Menger's theory of value is most similar to which economic theory?

The hypothesis of diminishing marginal utility. Signup and view all the answers

What concept was Menger close to formulating, but did not fully develop?

The allocation of income between alternative uses. Signup and view all the answers

What was the primary issue that caused Menger to create his own theory of value?

He had little help with pricing theories based on the labor theory of value. Signup and view all the answers

Which concept did Menger explicitly put forward?

The subjective value of a good decreases with increased consumption. Signup and view all the answers

What is the best description of Jevons' approach to research?

A blend of data collection and theoretical analysis. Signup and view all the answers

What problem does Walras's theory of general equilibrium face in determining all prices in the economy?

It only determines relative prices, requiring the setting of one price as a numeraire. Signup and view all the answers

What is the essential principle behind Walras's Law?

All of the above. Signup and view all the answers

What assumption does Walras's model make regarding production?

Production uses fixed coefficients, meaning input proportions are fixed. Signup and view all the answers

How does Walras's Law address the issue of overdeterminacy in his model?

It demonstrates that one equilibrium condition in the model can be derived from the others. Signup and view all the answers

What does the concept of "tatonnement" represent in Walras's theory?

The process of market adjustment towards equilibrium, facilitated by an auctioneer. Signup and view all the answers

What is the 'classical dichotomy' as it relates to Walras's theory?

The separation of the real economy from the monetary economy, with money being neutral in its effect on real variables. Signup and view all the answers

What is the role of money in Walras's theory?

Money is a necessary tool for facilitating exchange and overcoming liquidity problems. Signup and view all the answers

What is the main criticism of Walras's theory of general equilibrium?

It is mathematically complex and lacks practical applications to real-world problems. Signup and view all the answers

How does Walras's theory of general equilibrium relate to individual market behavior?

It provides a framework for understanding how individual market behavior can be integrated into a coherent and consistent explanation of the functioning of an entire competitive economy. Signup and view all the answers

Why did Walras develop the theory of "tatonnement"?

He wanted to understand how the market mechanism arrives at the equilibrium. Signup and view all the answers

What was one of Walras's beliefs regarding economic analysis?

It requires a theoretical foundation for practical problems. Signup and view all the answers

How did Walras utilize mathematical methods in economics?

To clarify complex economic ideas more succinctly. Signup and view all the answers

What does the model of exchange determine?

The ratio between quantities traded of the goods. Signup and view all the answers

What does the numeraire refer to in this economic context?

The primary commodity used as a unit of account. Signup and view all the answers

Which law did Walras rediscover that helps maximize consumer utility?

Gossen's second law. Signup and view all the answers

What is meant by general equilibrium in Walras's analysis?

The interaction between firms and consumers in the economy. Signup and view all the answers

Why is absolute price considered meaningful only after making a decision on a unit of account?

It needs context from a chosen commodity for interpretation. Signup and view all the answers

What common misconception might people have regarding the use of mathematical methods in economics?

They assume it alienates the layman from economic studies. Signup and view all the answers

Study Notes

Marshall and the Theory of Partial Equilibrium

Marshall's book Principles of Economics introduced the method of partial equilibrium analyses and emphasized the idea of economics as the study of supply and demand, not just an idea, but a multifaceted concept.
The supply and demand theory is easily teachable.
The theory is presented as a continuation of classical tradition, not an innovation.
Explained that everything that could be explained mathematically must also be expressible in words; otherwise, it lacks clarity and value.

Partial Analysis

The fact that controlled experiments in economics are often impossible leads to a focus on partial analyses instead of general equilibrium theory (which is complex).
The method of partial equilibrium study focuses on individual markets, assuming other factors remain constant.
This approach analyzes situations where multiple short reasons, rather than long and complicated explanations, are required.

Period Analysis

Marshall's method involves analyzing price and quantity determination in different time periods.
Short run: supply fixed, demand determines the price
Long run: production apparatus and employment can be varied
Very long run/secular run: technological and organizational changes can occur

Sraffa's Critique

Sraffa criticized partial equilibrium analyses, arguing that changes in the volume of production in one industry can affect the costs of firms in other industries.
Interdependencies between industries make isolating one market for analysis insufficient.

Economics Evolving: Chapter 8

Profound changes in economic theory occurred in the 1870s.
The changes occurred rapidly and globally.
A stronger emphasis developed on individual economic agents (firms and consumers).
The demand side in markets for consumer goods became important.

William Stanley Jevons

Jevons was a pioneer in the quantitative and mathematical approach to economics.
He emphasized the importance of mathematical models in economics, contrasting strongly with previous authors.

The Mathematical Method

Jevons stressed mathematics and quantitative analysis in economics.
Jevons criticized other economists for not recognizing the importance of mathematical models in economic thought.

Marginal Utility Theory

Utility is a subjective property of commodities, tied to the individual's judgment and attitude.
The value of utility decreases as consumption increases (law of diminishing marginal utility).
Jevons established distinctions between total utility and marginal utility.
Marginal utility is a decreasing function of the consumed quantity of a product.

Demand and Prices

Jevons's theory of demand highlighted the importance of marginal utility.
Market prices are determined by the interplay of supply and demand.

The Austrian School: Menger, Böhm-Bawerk and Wieser

Menger, Böhm-Bawerk, and Wieser are considered pioneers of the Austrian School.
They developed a theory of value based on marginal utility and subjective preferences which is in stark contrast with earlier classical viewpoints.

Leon Walras

Walras strongly influenced economic thought, particularly through the theory of general equilibrium.
He formulated a general equilibrium theory, based on mathematical models of economic problems.
His theory explains how equilibrium arises in a competitive market using mathematical methods which were considered revolutionary at that time.

Equations

Walras's general equilibrium model consists of numerous supply and demand equations that account for every possible economic interaction.
Walras’s Law demonstrates the inherent relationships between these equations and how equilibrium prices can be determined.
This model is essentially correct, assuming that one price can be used as the unit of measurement.
Problems arise in practice because real market behavior may not accurately reflect this model.

Theory of Tatonnement

Walras proposed the tâtonnement method, a dynamic process of adjustments towards equilibrium through successive trials.
Market prices are adjusted (or "feel around," like the French term implies) upward or downward until equilibrium is achieved.
The "auctioneer" role in pricing, used in Walras's models, is a way to simulate price adjustments.

The Problem of Existence

Walras's general equilibrium model faces the hurdle of demonstrating that a solution actually exists (a consistent set of prices).
Real-world prices cannot be truly negative.

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Description

Explore the concepts of partial equilibrium as presented in Marshall's Principles of Economics. This quiz delves into the supply and demand theory, its clarity, and the focus on individual markets within economics. Test your understanding of this critical method in economic analysis.