Neoclassical economics

All life of Alfred Marshall was held at Cambridge University. There he studied, and then taught and engaged in scientific work.

In Marshall's time, students were still studying economics on Milla's Principles of Political Economy. Marshall decided to correct this situation and in 1890 published his book "Principles of Economic Science."

Today's microeconomic theory as a whole is very little different from what Marshall wrote about. Marshall schematically divided the microeconomic theory into four parts:

Demand

The theory of demand gives an answer to the question: if the market price changes, how will the quantity of goods that consumers want to buy change?

Sentence

The supply theory explains how producers respond to the change in the market price.

Equilibrium

The theory of equilibrium explains how the market price is established depending on supply and demand.

Theory of the firm

The theory of a firm (sometimes called the theory of profit) describes the behavior of firms seeking to maximize their profits.

Marshall came up with a very simple way to show his idea in the form of a diagram. It turned out that it is very convenient to represent the demand and supply with lines on the graph in the coordinates "price" - "quantity". Marshall denoted demand by the letter D, and the sentence - S (according to the first letters of the corresponding English words demand and supply). Similarly, the price received the designation P (English price), and the quantity - Q (English quantity).

On the one hand, the higher the price, the less the goods consumers can purchase. On the other hand, the higher the price, the more the producers want to manufacture, diverting their resources from the production of other goods. The demand curve, therefore, has a negative slope, and the supply curve is positive. At some point these curves intersect. In other words, there is some price at which the amount of demand is equalized with the value of the offer (exactly according to Walro).

Naturally, Marshall's theory, when examined in more detail, looks a little more complicated. That's why we will definitely return to it and consider each of the four parts in more detail.1

So, the paradox of water and diamonds has finally been clarified. The puzzle of Smith was solved. However, the enigma of Marx remained unsolved: why does economic growth occur cyclically? Looking ahead, we will say that there is no universal answer to this question until now. The two greatest economists of the twentieth century - John Maynard Keynes and Josef Alois Schumpeter - gave completely different answers to this question.