Questions for Review with Answers
Chapter 6. History of Economic Thought II. Neo-Classical Economics
I. An Outline of Neo-Classical Economics
Chapter 6 – Question 1
Please summarise the contributions made by the following neo-classical economists:
A. Léon Walras.
B. Alfred Marshall.
C. V.F.D. Pareto
D. Arthur Cecil Pigou
* A. Walras laid all the foundations of neo-classical economics: marginal analysis, mathematical economics and general-equilibrium theory.
* B. Marshall blended classical theory with the theories of Walras to form a new paradigm.
* C. Pareto contributed indifference analysis, a sophisticated theory of consumer behaviour, and Pareto optimality, which plays a fundamental role in welfare economics. Pareto optimality exists where A's condition (for instance, income or consumption) can only be improved by worsening B's condition.
* D. Pigou contributed Pigovian taxes, which are sin taxes. He also espoused a redistribution of incomes through taxes. By applying marginal analysis to the utility of money, he propounded that the marginal utility of additional income is much lower for a rich man than for a poor man.
Chapter 6 – Question 2
How did Walras prove that general equilibrium is possible?
* With the help of simultaneous equations. Walras stated that for each commodity in the world there are two unknowns: the quantity changing hands and the price at which it changes hands. These unknowns can be calculated since for each commodity there are also two equations: one underlying its demand curve, the other one underlying its supply curve.
II. The Lives and Works of the Two Leading Neo-Classical Economists
Chapter 6 – Question 3
What is Marshall's famous scissors-statement about?
* The term "two blades" refers to the fact that prices are equally determined by supply and demand.
Chapter 6 – Question 4
Why do some prominent economists hold Walras in higher esteem than Marshall?
* Well, the contributions of Walras are the essence of today's microeconomics. They only needed some linguistic refinement and clarification.
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