Edited by Mark Blaug and Peter Lloyd
Chapter 1: Marshallian Cross Diagrams
Thomas M. Humphrey The most frequently used geometric tool of microeconomic analysis is the familiar partial equilibrium demand-and-supply curve diagram of the textbooks. Generations of students and their teachers have employed its intersecting curves (1) to depict the equilibrium or market clearing price and quantity of any particular good or factor input, and (2) to explain how (Walrasian) price or (Marshallian) quantity adjustments ensure this equilibrium, the first by eliminating excess supply and demand, the second by eradicating gaps between supply price and demand price. The diagram achieves much with little. It illustrates how parametric shifts in its two curves caused by changes in tastes, incomes, technology, factor prices and prices of related goods operate to alter a good’s equilibrium price and quantity. It shows how the shifting and incidence of a perunit tax or tariff on buyers and sellers depends upon elasticities of demand and supply. It depicts how price ceilings and price floors generate shortages and surpluses respectively. With it one can compare the allocative effects of competitive versus monopoly pricing and indicate the welfare costs of market imperfections. For all its simplicity, it is a powerful and flexible tool. Economists typically associate the diagram with Alfred Marshall, the English neoclassical economist who was its most influential nineteenth century expositor. So strong is this association that the diagram has been christened the Marshallian cross, or Marshallian scissors after Marshall’s analogy comparing the price-determining properties of a brace of demand and supply curves with the cutting properties of the...
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