The conflict between general equilibrium and the Marshallian cross

Saglam, Ismail and Zaman, Asad (2010): The conflict between general equilibrium and the Marshallian cross.

Abstract

There is a conflict in the mechanism for price determination used in a Marshallian partial equilibrium supply and demand framework and the Walrasian general equilibrium framework. It is generally thought that partial equilibrium is a simplified approximation to the complexities of the general model. The goal of this paper is to show that there is a strong conflict between the two models - intuitions and heuristics suggested by partial equilibrium are contradicted by extensions to the general equilibrium case. We review the literature on the conflict and also provide a very simple model where partial equilibrium analysis fails completely. Several intuitively plausible remedies fail to restore partial equilibrium results. We show that Marshallian analysis can be made to work only under rather stringent conditions requiring joint production with low fixed costs and decreasing returns resulting in identical production proportions by all producers.

• Item Type: MPRA Paper
• Language: English
• Keywords: Partial equilibrium; General equilibrium; Perfect competition
• Subjects: D - Microeconomics > D0 - General > D01 - Microeconomic Behavior: Underlying Principles

References

Aslanbeigui, N., and M. I. Naples. (1997). Scissors or Horizon: Neoclassical Debates about Returns to Scale, Costs, and Long-Run Supply, 1926 – 1942. Southern Economic Journal 64(2): 517-30.

Bradford, D. (1978). Factor Prices May Be Constant But Factor Returns Are Not. Economics Letters 1: 199-203.

Card, D., and A. Krueger. (1997). Myth and Measurement: The Economics of the Minimum Wage. Princeton, New Jersey: Princeton University Press.

Cohen, A. J., G. C. Harcourt. (2003). Retrospectives: Whatever Happened to the Cambridge Capital Theory Controversies? The Journal of Economic Perspectives 17(1): 199-214.

Hayashi, T. (2009). Smallness of a Commodity and Partial Equilibrium Analysis. Unpublished.

Kreps, D. M. (1990). A Course in Microeconomic Theory. Princeton: Princeton University Press.

Lee, F. S. (1981). The Oxford Challenge to Marshallian Supply and Demand: The History of the Oxford Economists' Research Group. Oxford Economic Papers, New Series 33(3): 339-51.

Lee, F. S. (2011). Post-Keynesian Price Theory: From Pricing to Market Governance to the Economy as a Whole. In Handbook of Post Keynesian Economics, ed. G.C. Harcourt and P. Kriesler, Oxford: Oxford University Press(forthcoming).

Lee, F. S., and S. Keen. (2004). The Incoherent Emperor: A Heterodox Critique of Neoclassical Microeconomic Theory, Review of Social Economy, 62(2): 169-99.

Mansfield, E. (1994). Microeconomics: Theory/Applications, Eight Edition. New York: W. W. Norton.

Marshall, A. (1890). Principles of Economics, Eight Edition. London: Macmillan.

Mas-Colell, A. Whinston, M. D., and Green, J. R. (1995). Microeconomic Theory, New York: Oxford University Press.

Miyake, M. (2006). On the Applicability of Marshallian Partial-equilibrium Analysis. Mathematical Social Sciences 52(2): 176-96.

Nicholson, W. (2002). Microeconomic Theory: Basic Principles and Extensions, Eight Edition. South-Western/Thomson Learning.

Opocher, A., and I. Steedman. (2008a).The industry supply curve: Two different traditions. European Journal of History of Economic Thought 15(2): 247-74.

Opocher, A., and I. Steedman. (2008b). Long-Run Rising Supply Price and the Numeraire. Metroeconomica 59(1): 74-84.

Ozanne, A. (1996). Do Supply Curves Slope Up? The Empirical Relevance of the Sraffian Critique of Neoclassical Production Economics. Cambridge Journal of Economics 20(6): 749-762.

Pigou, A. C. (1927). The Laws of Diminishing and Increasing Cost. Economic Journal 37(146): 188-97.

Pigou, A. C. (1928). An Analysis of Supply. Economic Journal 38(150): 238-57.

Pindyck, R. S., and D. L. Ribinfeld. (2001). Microeconomics, Fifth Edition. Upper Saddle River: Prentice Hall.

Robinson, E. A. G. (1931). The Structure of Competitive Industry. Cambridge: Cambridge University Press.

Robinson, J. (1941). Rising Supply Price. Economica 8: 1-8.

Samuelson, P. A. (1987). Sraffian Economics. The New Palgrave Dictionary of Economics. London: Macmillan.

Sraffa, P. (1925). Sulle Relazioni tra Costo e Quantita Prodotta. Annali di Economia 2: 277-328.

Sraffa, P. (1926). The Laws of Returns under Competitive Conditions. Economic Journal 36(144): 535-50.

Sraffa, P. (1930). Symposium on Increasing Returns and the Representative Firm A Criticism and Reply. Economic Journal 40(157): 89-93.

Sraffa, P. (1960). Production of Commodities by Means of Commodities. Cambridge: Cambridge University Press.

Steedman, I. (1988). Sraffian Interdependence and Partial Equilibrium Analysis, Cambridge Journal of Economics, 12: 85-95.

Stigler, G. J. (1942). The Theory of Competitive Price. New York: Macmillan.

Stiglitz, J. E., and C. E. Walsh. (2002). Principles of Microeconomics, Third Edition. New York: W. W. Norton and Company.

Varian, H. R. (1992). Microeconomic Analysis, Third Edition. New York: W. W. Norton and Company.

Varian, H. R.(2002). Intermediate Microeconomics: A Modern Approach, Sixth Edition. New York: W. W. Norton and Company.

Viner, J. (1931). Cost curves and supply curves. Zeitschrift fur National Okonomie 3: 23-46.

Vives, X. (1987). Small Income Effects: A Marshallian Theory of Consumer Surplus and Downward Sloping Demand Curves. Review of Economic Studies 54(1): 87-103.

Vives, X. (1999). Oligopoly Pricing. Cambridge: MIT press.