People's understanding of market behavior and how industries operate has its roots in the work done by European economists more than a century ago.
On the other hand equation II shows that supply is also the function of price i. The above diagram shows DD and SS the demand and supply curves respectively.
This is static analysis of price determination, for all variables such as quantity supplied, quantity demanded and price refer to the same point or period of time.
Generally, the economists are interested in the equilibrium values of the variables which are attained as a result of the adjustment of the given variables to each other. That is why economic theory has sometimes been called equilibrium analysis.
Till recently, the whole price theory in which we explain the determination of equilibrium prices of the products and factors in different market categories were mainly static analysis.
The values of the various variables such as demand, supply, and price were taken to be relating to the same point or period of time.
The concept of Macro-Static explains the static equilibrium position of the economy. This concept is best explained by Prof.
Kurihara in these words: It simply shows a timeless identity equation without any adjusting mechanism. A Comparative Static analysis compares one equilibrium position with another when data have changed and system has finally reached another equilibrium position. It does not show how the system has reached the final equilibrium position with a change in data.
It merely explains and compares the initial equilibrium position with the final one reached after the system has adjusted to a change in data. Thus, in comparative static analysis, equilibrium positions corresponding to different sets of data are compared.
Let us see few examples of comparative static analyses. Consider our previous example of static analysis of demand and supply which determine the equilibrium quantity and price.
We can thus think of an analysis in which we start with a system in equilibrium. We now introduce a change and study the ultimate effect of a change. This can be explained with the following diagram The original equilibrium between DD the demand curve and SS the supply curve is at E1.
When demand increases to D1D1, as a result of increase in income, the new equilibrium is at E2 at the price OP2. In comparative static analysis, we are concerned only with explaining the new equilibrium position at point E2 and comparing it with E1.
We are not concerned with the whole path the system has travelled from E1 to E2. Alfred Marshall has made extensive use of comparative static in his time-period analysis of pricing under perfect competition. Although the dynamic analysis of the two equilibrium positions with different sets of data is more comprehensive and informative.Cardinal Analysis.
Ordinal Analysis. This approach was developed by Alfred Marshall. This approach was developed by J. R. Hicks and R. J. D. Allen. This analysis assumes that satisfaction that a consumer derives from various goods and services could be expressed in terms of cardinal numbers.
Principles of Economics: An introductory volume, by Alfred Marshall, Alfred Marshall () Principles of Economics: an introductory volume. Written: Source: Rod Hay's Archive for the History of Economic Thought, McMaster University, Canada html Markup: Andy Blunden.
The law of diminishing marginal utility has been started by Alfred Marshall as “The additional utility which a person derives from an increase of his stock of a commodity diminishes with every increase in the stock that he or she already has.”. Lionel Robbins led on frontal attack on the Marshallian view in the study of economics.
The main points of criticism are: 1. The law of diminishing marginal utility explains the downward sloping demand curve Definition According to Marshall, “The additional benefit a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has”.
Download free the book “Principles of Economics” – by G.