What is Alfred Marshall’s theory of a long-run (long period) competitive equilibrium (the theory still used to this day to explain the long-run outcome of perfectly competitive markets)? What is...

What is Alfred Marshall’s theory of a long-run (long period) competitive equilibrium (the theory still used to this day to explain the long-run outcome of perfectly competitive markets)? What is the relationship between the price of a commodity and its unit cost in the long-run? What are the processes that force market prices toward that long-run outcome? Does utility play a role in the determination of price in the long-run?

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Tamara K. H. | Middle School Teacher | (Level 3) Educator Emeritus

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Alfred Marshall, seeing that it is not helpful to financial planners to simply understand that everything is dependent upon everything else wanted to develop a "partial analysis" method in which an economy could be divided up so that the effects of one variable could be examined by itself without worrying about how the variable affects other markets. To do so, he realized that we must examine the factors that influence the equilibrium in a market, "such as incomes, tastes, and expectations," because those factors are assumed to influence demand when the market is in a relationship of ceteris paribus, meaning "all things being equal." In a state of ceteris paribus, "supply equals demand," and when one factor creating ceteris paribus is diminished, then a partial equilibrium is created, requiring a solution. We can keep diminishing various factors until we have different solutions we can compare; we call this method of analysis comparative statistics. However, what's missing in comparative statistics that Marshall was aware of is the factor of time in the analysis (International Encyclopedia of the Social Sciences, "Marshall, Alfred").

Hence, Marshall wanted to create a "timeperiod concept" he could apply to comparative statistics. To do so, Marshall developed market "operational, not clock, time" measurements, namely the market period, the short-run period, and the long-run period ("Marshall, Alfred").

The long-run model shows that production levels can be changed because their exists an equilibrium between supply and demand. The long-run model shows that companies can feel at liberty to adjust any costs or enter or leave a market depending on profit analysis. In a long-run, prices will decrease because supply increases. However, over the long-run, suppliers will also increase prices of raw materials to earn more profit from the increase in supply, which will lower production levels and raise prices. Hence, over the long-run, inflation will also occur as a result of increased demand (Investopedia, "Macroeconomics--Short and Long-run Macroeconomic Equilibrium"; Investopedia, "Long Run").

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