The process that Alfred Marshall is describing in book V, chapter III, paragraph 6 is partial equilibrium. According to Marshall, “when demand and supply are in equilibrium, the amount of ….may be called the equilibrium-amount, and the price at which it is being sold may be called the equilibrium-price” (Marshall 201). Nevertheless, according to Marshall, the factors that lead to changes in demand and supply are inexplicable to some extent and “are not sufficient to illustrate all the disturbances with which the economist and the merchant alike are forced to concern themselves” (Marshall 202).
The process of partial equilibrium, as described by Marshall in “Principles of Economics,” only considers a certain portion of the market in relation to market patterns. For instance, Marshall points out that in real life, it is impossible to track external market factors apart from supply and demand. In partial equilibrium, the demand-and-supply model functions without the consideration of quantities and prices in other markets, as explained by Marshall.
The simplistic nature of Marshall’s equilibrium makes his economic principle easy to track. The results that are produced by this form of equilibrium may be precise, but they are not reflective of the real-world economic scenario. Marshall’s equilibrium system assumes that when considering demand and supply patterns, the prices of alternative products do not change, and the buyers’ level of income remains constant. Partial equilibrium exempts itself from the burden of exploring the entire economy.
The economic principle that Marshall is describing is an old-economic strategy that operated under an umbrella of assumptions. For example, partial equilibrium operates under the assumption that the price of a certain product is predetermined and constant. Marshall outlines that “when the demand price is equal to the supply price, the amount produced has no tendency either to be increased or to be diminished” (Marshall 201). Another assumption of Marshall’s equilibrium is that the economy is often supplied with information about factors that might affect demand and supply. Partial equilibrium also ignores the effects that substitute-goods can have on a market.
Since the publication of Marshall’s “Principles of Economics,” new economic theories and principles have come up. For instance, most economic stakeholders do not use partial equilibrium in real-world scenarios. When describing equilibrium-economics today, the principle that is preferred over partial-equilibrium theory is general equilibrium. General equilibrium is a common modern economic theory that covers all aspects of the economy. Using the general equilibrium theory, the relationship between supply and demand can be considered in relation to interrelated markets. The general equilibrium’s focus on the entire economy makes it better than Marshall’s partial theory.
The main difference between Marshall’s description of equilibrium and the general equilibrium theory in modern economic scenarios is that the latter manages to cover all aspects of the economy through its ‘bottom-up’ model.
Furthermore, the general equilibrium theory bases its assumptions on more realistic premises than Marshall’s description of equilibrium. For instance, the general theory is based on the assumption that all economic sectors depend on each other, while Marshall’s principles assume that businesses operate independently. Therefore, changes in one sector of the economy can affect several other sectors according to modern economics. In addition, the general equilibrium theory has a more sensible price-determination premise than partial theory. According to general equilibrium, the costs of commodities are arrived at ‘mutually and simultaneously’ as opposed to Marshall’s premise that the price of a certain product is determined by static factors (Marshall 202).
Works Cited
Marshall, Alfred. Principles of economics, New York, NY: Cosimo Inc, 2009. Print.