Академический Документы
Профессиональный Документы
Культура Документы
Lesson 3
Marshall vs. Walras on
Equilibrium and Disequilibrium
3. Marshalls approach:
1. basic assumptions about the trading process
2. the model of an Edgeworth Box economy
3. the temporary equilibrium model
4. limitations and extensions
Let p = (p1, p2) 2++ be the price system, where prices are
expressed in terms of units of account and are positive in view of
the strong monotonicity of preferences.
p 12 x 1i x 2i p 12 1i 2i , 1
z 2 p W12 , 0 , 2
where p12W is a Walrasian equilibrium price of commodity 1 in terms
of commodity 2.
Franco Donzelli Lesson 3 - Marshall vs. Wa 15
Walrass model of a pure-exchange, two-commodity economy 4
On this point, however, Walras is very clear. For, a few lines after
the securities example, he adds:
Similarly, even if one can predict that the trading process will come
to an end, neither the final allocation nor the final rate of exchange
can be predicted, failing further assumptions.
C EB x C P EB u 1 x C1 u 1 1 , u 2 x C2 u 2 2 .
The real distinction then between the theory of buying and selling
and that of barter is that in the former it generally is, and in the latter
it generally is not, right to assume that the stock of one of the things
which is in the market and ready to be exchanged for the other is
very large and in many hands; and that therefore its marginal utility
is practically constant. (Marshall, 1961a, p. 793)
u i x 1i , x 2i v 1i x 1i x 2i , i 1, 2 ,
where (ui(x1i, x2i)/(x1i)) = v1i(x1i), assumed positive and decreasing for
x1i [0, 1], depends only on the quantity consumed of commodity 1,
while (ui(x1i, x2i)/(x2i)), the marginal utility of the money-like commodity,
is constant (normalized to 1).
Hence
MRS21i(xi) = (ui(x1i, x2i)/(x1i)) / (ui(x1i, x2i)/(x2i)) = v1i(x1i)
depends only on the quantity consumed of commodity 1.
Let
d1i(x1i,1i) = max {0, x1i - 1i}
be consumer is net demand proper for commodity 1 for x1i [0, 1]
Franco Donzelli Lesson 3 - Marshall vs. Wa 34
Marshalls model of an Edgeworth Box economy 8
If the consumers tastes are not identical, then p1maxd > p1mins
Let d1(p1d) = i d1i(p1id), for p1d = p1id, for i = 1, 2 and p1d [0, );
let s1(p1s) = i s1i(p1is), for p1s = p1is, for i = 1, 2 and p1s [0, ).
Yet, in spite of its appearance, and unlike equation (2), equation (7) is
not a market-clearing equation; similarly, p1M, unlike p12W , is not a
market a market-clearing price.
In fact, in general, the two consumers will not carry out their trades at
the constant rate p1M; and yet, even if different trades take place at
different rates, at the end of the process the total quantity traded of
commodity 1 will still be equal to the common value q1(p1M).
Franco Donzelli Lesson 3 - Marshall vs. Wa 39
Marshalls model of an Edgeworth Box economy 13
An illustration:
Assumption 1. (Utility functions quadratic in commodity 1 and quasi-linear
in commodity 2)
ui(x1i, x2i) = v1i(x1i) + v2i(x2i) = ai(x1i - 1i) - bi(x1i - 1i)2 + x2i, i = 1,2.
Hence: MRS21i(xi) = v1i(x1i) = ai - bi(x1i - 1i) , i = 1,2.
Assumption 2.
K12() = MRS211(1) = a1 > a2 = MRS212(2) = k12()
Assumption 3.
11 < 12 ; v11(1) < v12(0)
Equilibrium:
p11d(d11) = p11s(s12) and d11 = s12 . Hence:
p1M = (a1b2 + a2b1) / (b1 + b2) ;
q1M = (a1 - a2) / (b1 + b2)
Franco Donzelli Lesson 3 - Marshall vs. Wa 40
Marshalls model of an Edgeworth Box economy 14
p11d, p12d, p1d,
p11s p11s p12s p12 s
p1s
p1maxs
s1(p1s)
v11(11) p1maxd
v12(12) p1M
p1mins
d1(p1d)
p1mind
p11d p12d
11 1 -11 1 - 12 12 1 d , s
d11, s11 d12, s12 q1M 1 1
d I1 p I,M
1 s I I,M
1 p 1 8
d I1 p I,M
1 s I I,M
1 p 1 0 , 9
it being understood that, in deriving equations (8) and (9), the
Marshallian aggregate demand and supply functions for commodity 1
are, respectively:
d1I(p1d) = i d1i(p1id), for p1d = p1id, for i = 1, , I, and p1d [0, ),
and
s1I(p1s) = i s1i(p1is), for p1s = p1is, for i = 1, , I, and p 1s [0, ).
In equations (8) and (9) p1M is the Marshallian temporary equilibrium
money price of commodity 1, while the common value d 1(p1M) = s1(p1M)
= q1(p1M) is the Marshallian temporary equilibrium quantity of
commodity 1.
Franco Donzelli Lesson 3 - Marshall vs. Wa 46
Marshalls temporary equilibrium model 4
Marshalls interpretation of equations (8) and (9) is essentially the
same as that of equations (6) and (7). Yet Marshalls claims are not
entirely justified.
Marshalls temporary equilibrium model is developed by means of
an example, referring to a corn market in a country town, where
corn is traded for money. The illustration is based on the facts
summarized by the following table (Marshall, 1961a, pp. 332-333):